Good afternoon. My name is Heather and I will be your conference operator today. At this time I would like to welcome everyone to the M/I Homes Incorporated Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session [Operator Instructions]. Thank you. And now I would like to turn today’s call over to our Mr. Phil Creek. You may begin.

Thank you very much. Joining me on the call today is Bob Schottenstein, our CEO and President; Tom Mason, EVP; Derek Klutch, President of our Mortgage Company; Ann Marie Hunker, VP, Corporate Controller; and Kevin Hake, Senior VP. First, to address Regulation Fair Disclosure, we encourage you to ask any questions regarding issues that you consider material during this call, because we are prohibited from discussing significant 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, including comments related to COVID-19. Also be advised that the Company undertakes no obligation to update any forward-looking statements made during this call. Also during this call, we disclose certain non-GAAP financial measures. A presentation of the most directly comparable financial measure calculated in accordance with GAAP and a reconciliation of the differences between the non-GAAP financial measure and the GAAP measure was included in our earnings release issued earlier today that is available on our website. With that I will turn the call over to Bob.

Thank you, Phil. And thank you for joining us today on our call. The second quarter was a record setting quarter for M/I Homes. In fact, it was the best quarter in company history. With record set and virtually every important financial metric. We are excited to share our strong results with you. As everyone knows, the first half of 2020 has been a time of significant economic and social instability in our country and throughout the world, precipitated in large part by an unprecedented almost unimaginable health crisis. We began the quarter in a highly defensive operating mode, proceeding with extreme caution and concern, doing our best to react to the challenging and complex conditions, while adapting our operations to safeguard and protect as much as possible, our employees, our customers, and our work environment, all the while at the same time continuing to try to sell and build quality home. The last half of March and early April saw a precipitous decline in our business, with new contracts declining significantly. Housing conditions, both for us and other builders, then began to improve in the last half of April. That improvement materially accelerated for us, as our business rebounded significantly in May and June, to record setting levels. Specifically for the quarter, April new contracts were down 26% year-over-year. May was our best sales month ever at the time with new contracts up 39% year-over-year only to then be quickly surpassed by our record setting June sales with new contracts up 79% year-over-year. We ended the quarter selling a record 2,261 homes, 31% better than a year-ago. The tremendous sales momentum we experienced in may and June has continued into July. We believe there are a number of macro and micro economic factors contributing to our strong sales results.…

Thanks, Bob. As far as financial results new contracts for the second quarter increased 31% to 2261, and all time quarterly record compared to 1,731 for last year’s second quarter. Our new contracts were down 26% in April, up 39% in May and up 79% in June. Our sales pace was 3.4 in the second quarter, and our cancellation rate was 14%. As to our buyer profile about 50% of our second quarter sales were to first time buyers, about the same as the first quarter. In addition, 45% of our second quarter sales were inventory homes, compared to about 50% in the first quarter. Our community count was to 220 at the end of the quarter, the same as last year second quarter to break down by region is 94 in the northern region and 126 in the southern region. During the quarter, we opened 22 new communities while closing 25 and we opened 39 new communities during the first half of the year. We delivered a second quarter record 1,835 homes in the second quarter, delivering 56% of our backlog compared to 58% a year-ago. And revenue increased 15% in the second quarter, reaching a second quarter record of 714 million. Our average closing price for the second quarter was 379,000, a 3% decrease when compared to last year second quarter average closing price of 389,000. And our backlog sales price is 396,000 up slightly from 395,000, a year-ago and our backlog average sale price of our smart series is 302,000. Our second quarter gross margin was 21.9% up 270 basis points year-over-year and up 170 basis points from the first quarter. A big reason for our margin improvement is due to our Texas operations. Our construction and labor costs were flat when compared to 2019 second quarter,…

Thanks Phil. Our mortgage and title operations achieved record second quarter results in pre-tax income revenue and the number of loans originated. Revenue was up 33% to $19 million due to a higher volume of loans closed and sold, along with improved pricing margins and a higher capture rate. For the quarter pre-tax income was $10.8 million, which was a 62% increase compared to 2019 second quarter. The loan to value on our first mortgages for the second quarter was 83% in 2020, up slightly from 82% last year, 77% of the loans closed in the quarter were conventional and 23% were FHA or VA, same as 2019 second quarter. Our average mortgage amount increased to $311,000 in the second quarter, compared to $308,000 last year. Loans originated increased to a second quarter record of 1375 loans, which was 33% more than last year, and the volume of loans sold increased by 31%. For the quarter the average borrower credit score on mortgages originated by M/I financial was 745, up from 741 last quarter. Our mortgage operation captured about 83% of our business in the second quarter, an increase from 79% last year. We maintain two separate mortgage warehouse credit facilities that provide us with funding for our mortgage originations prior to the sale to investors. At June 30th, we had $92 million outstanding under the MIF warehousing agreement, which is a $125 million commitment that was recently expanded and expires in May of 2021. And we also have $43 million outstanding under a separate $65 million repo facility, which expires in October of this year. Both facilities are typical 364-day mortgage warehouse lines that we extend annually. Now I will turn the call back over to Phil.

Thanks Derek. As far as the balance sheet, our financial condition continues to be very strong, with 1.1 billion in equity on June 30th, and cash balance of $94 million and no outstanding borrowings under our 500 million unsecured revolving credit facility. Also in June, we did extend our credit facility maturity to July of 2023. We are carefully monitoring our cash and our expenditures in the current uncertain environment. We continue to manage our balance sheet carefully. Total homebuilding inventory at June 30th was 1.8 billion, an increase of 67 million above last year. Our unsold land investment at June 30th is 810 million compared to 797 million a year-ago. And at June 30th,we had 378 million of raw land and land under development. And $432 million of finished unsold lots. We owned 5159 unsold finished lots with an average cost of 84,000 per lot. And this average lot cost is 21% of our 396,000 backlog average sale price. Our goal is to maintain about a one year supply of finished lots and to own a two to three year supply. Lots owned and controlled as of June 30th. Total more than 34,500 lots 14,800 of which were owned and 19,700 under contract, we own 6,900 watts in our northern region, and 7,900 watts in our southern region. And a year-ago, we owned more than 14,800 watts and controlled an additional 14,200 for a total of 29,000 lots. During this year’s second quarter, we spent 84 million on land purchases and 72 million on land development for a total of 156 million. Year-to-date, we have spent 160 million on land purchases, and 134 million on land development for a total year-to-date spend of 294 million. And at the end of the quarter we had 405 completed inventory homes, about two per community and 1.181 total inventory homes and of the total inventory 515 are in the northern region as 666 or in the southern region. At June 30th 2019, we had 464 completed inventory homes in 1,413 total inventory homes. This completes our presentation. We will now open the call for any questions or comments.

[Operator instructions] So, our first question comes from the line of Alan Ratner with Zelman and Associates.

Hey guys, good afternoon. Congrats on really an incredible quarter given the climate out there and congrats on all the records that you set at this to this period.

Thanks, Alan

I guess it is always tricky when you see growth rates like, like you and others are reporting here just to kind of conceptualize what that means for the business going forward, because clearly, the housing market is not meant to be growing at an 80% clip. And I guess I’m just curious how you see the next few months playing out. I mean, I think your last disclosure on your spec supply looks like specs are down about 20% year-over-year, you and others presumably are going to have to start a lot more homes over the next few months. And I’m just curious how you plan on managing the business through that is there a point where, it makes sense to push harder on price to slow things down because there is just the inefficiencies of growing at that level? Or do you feel like based on your land supply and labor availability that you can continue growing at maybe not these levels, but certainly greater levels than we saw in the past?

Well, first of all, three months ago, if you would have asked me what our growth rate would have been in April, May and June, I would have missed that guessed by 100%. Yes, we didn’t see this coming. And so it is very hard to know what is around the corner. But, I think the fact that it is so hard to know what is around the corner, I think serves as a guide as a management guide. As I mentioned, the momentum is continued into July, and while we give no specifics on July 1st of all months, not over yet, there continues to be, I think, just very good conditions for us. And I think I’m hearing that from some of our competitors as well, Particularly with respect to the more affordably priced communities. And I spoke about our land position. I think that it is as good as it is ever been, in terms of not just the number of lawsuits and the fact that the majority of them are off of our books, which is a great position to be in, given they’re given the uncertainty that we live in today. But the fact that the price points and that the community is coming on, give us a lot of confidence assuming that the market is there for us to grow at acceptable levels. I think, it is hard for businesses to grow much more than 10% or 20% a year. You start to get above that and things start to slip through the cracks. But I believe that we can do that if the economy is there. I think that, there are certain challenges right now less than you might imagine, but there are certain challenges on the construction side with certain logistics, mainly…

That is great. Thank you for all of that. And, yeah, I agree. Certainly the results do the talking. Second question if I could. Gross margin, best level we have seen in quite a long time. I would think that a lot of that strength was actually probably pre-pandemic that contributed to this quarter’s great margins. So, I’m just curious if you can - I know you are not going to give specific guidance, but just talk to maybe the pluses and minuses that we should think about going forward off of this quarter’s record level.

First of all And I think Phil may want to add a few comments on this. A year-ago in certainly two years ago, we were not where we wanted to be with regard to a number of our newer operations, not all of them, but certainly some. Several of our Texas operations were pulling us back, they weren’t performing at the level they should be. Those shifts have been righted that is contributing to lift. We are starting to get a lot of really good results from our firm from Sarasota, which is a newer market. Detroit time will come, but it is got a lot of upside down the road for us, not quite there yet. Minneapolis has just been a tremendous, contributor. We have only been there less than five-years. So I think that just some of our own internal operational improvement has contributed to margin. The other thing is, two years ago, smart series was about 15% of our business. Last year at this time, it was 24% of our business. Today its 35% and growing and our returns both at the gross margin line and the net line on our smart series sales and closings are better than on not. You know the average price is lower, but the returns, the percentages. So when you put all that in the blender, you sort of get where we are today. I don’t know if you want to add anything Pill.

The only thing Bob, is that just to drill down a little bit, Alan, if you look for instance that Houston in San Antonio, where today the majority of our business is smart series. It was not that way a year-ago. And the average sale price is more affordable, which is good. And also the margins are quite a bit better. So we are definitely getting a benefit from a combination of smart, Texas, all four of our Texas market, margins have improved a year-ago those margins were all below company average. Now they are accompanying average or better plus a market like Sarasota, as Bob mentioned, where we are just kind of getting started and kind of getting to scale as we are getting a little bigger there, we are getting a little more pricing power. So Sarasota is also helping. So we are really pleased with our margin improvement. Obviously, as our sales price has stabilized or gone down a little bit, it is very, very important that we control our costs, get SG&A efficiency, but also getting those margins up is very important to us. So we continue to work on that.

Fantastic. Good luck guys.

Thanks Alan.

Your next question comes from the line of Aaron Hecht with JMP Securities.

You guys hit on most of the major themes going on here, but I was wondering on the spec side, are the margins running on par with traditional builds right now or is that spread still negative? And are you seeing buyers quickly or the buyers still preferring to build the home the way they want?

First of all, I will try to answer part of that. The margins on specs historically have been 100 to 200 basis points lower than margins on new builds, that is narrowed somewhat. And in fact, we have a number of instances. It is pretty hard to paint it with too broad a brush, but we have a number of instances in certain of our markets where the spec margins are, you know basically the same as 2B builds. And I think that I didn’t mention that in response to the previous question, but that is probably provided some margin lift as well. So, your question helps inform the previous question. In terms of buyer preference, I think that there has been a little bit more demand for specs over the last 90-days. Phil, I don’t know if you would -.

April did blip off a little bit. But if you’d look at us, even, the last few quarters, we tend to be in that 40% to 50% range. Also, I think a lot of it is that we try to have a pretty definite spec strategy on a subdivision level. Again, it goes back to Bob as far as, our operators and the really good job they have done, to make sure that we are very mindful of not only the lot we put the speck on, but the house the product type the price point. Definitely some people do not want to stay in a housing transaction for six months, brokers tend to want to take buyers to places where they can get a home quicker, get their commission quicker and so forth. But the margins have improved on the specs, we think it is a strength that we have at our price point to have a couple of finished specs for community. Also a couple of specs in the process. So, if people still want to make selections, they can with a compressed cycle time. Also, it does help the construction schedule, and that we kind of complete more of an ebb flow type situation helps in our production teams and our costing. So, we do feel very good about that. We are down a couple of hundred specs now than we were, a year-ago, primarily just because of our, very, very strong sales, our community counts about the same, but hopefully we will reload that a little bit as we go forward. But again, that just depends on market conditions.

Right. And you talked about your land position being the strongest that you have had in years. But obviously, your orders are by magnitude we haven’t seen before. Is that going to cause some irregularities in terms of the timing of community rollouts or how you plan to phase in different land positions over the next couple years?

It could - I think we will manage through it. I mean, we are dealing with it now. I mean, we are all over land development schedules, and land delivery schedules. Some of that you can’t totally control because you are relying on third party inspections and that kind of stuff. But look, we own and control nearly 35,000 loss. And even if you add a factor of 10%, or 20% to our current sales rate, that is at least a four years supply. And the thing I like about it most are two things right price point. And we have the right to walk away from 60% of the world turns upside down.

It is a problem we have right now.

Yes. If you look at our communities in general, about 50% of our communities, we do the development, we control the development. So, we think we have a pretty good mix of reliance on third party people and also things that are on us 100%. And I mean sales pace, selling communities faster than we thought is obviously impacted our community count, but it really gets down to a division-by-division subdivision-by-subdivision situation. We feel like overall, we are really in pretty good shape.

Alright. And then on the financial services side, it was know that you had a higher capture rate, what is the degree of difference in that capture rate? And is that something you can maintain, that is needs internally to drive out or was that because of this unique situation?

The comparison was 83%, this quarter 79% last year in the second quarter, year-to-date we are actually close to 85% capture rate. So we know it is high. We think that is a little bit on the high side, but we feel pretty confident that we’ll be able to maintain, mid to low 80% capture rate going forward.

And I don’t want to speak for Derek, but I will. I think that he would also say that in addition to the better pace, better margins, better returns with our smart series, our capture rates, I think there is greater opportunity to capture if you will, on smart series homes. That buyer that is a lower price point doesn’t walk in with their own lender, or private banker or hang owner or anyone else. So that could and should contribute to be us being able to keep it at this higher level.

Alright. That is all I got. Thanks for the time, guys. Good quarter.

Thank you.

Thanks Aaron.

[Operator Instructions] Your next question comes from the line of Art Winston with Pilot Advisories.

Hi on behalf of all the stock holders we just want to thank you for the excellent management of this business.

Thanks so much for that. I appreciate it.

I just had two questions. In effect, what has happened the inventories have grown a little bit over the last 12 months and you managed to pay back debt, your actual debt is down and you have no borrowings on your bank loans at all, and with mortgage rates at 3% why do you keep talking of - an ability to make money, make a good profit on the smart smaller homes? Why are you so cautious about buying land and increasing the inventory? It seems like this would be a good time with your financial position to go out and not be as cautious as the way you described yourself?

Well, I think two things can be true. I think you can own and control almost 35,000 lots, which is what we do own and control. And you can still be cautious about what you are doing. And with what we have on our plate, we have the ability to grow this business pretty significantly over the next several years, assuming that the economic conditions allow for that kind of thing. We have a long track record. And I think that we intend to take full advantage of the conditions that are out there, but I think it would be - I just wouldn’t feel honest, if we didn’t acknowledge that the conditions that exists within the economy are very hard to understand and predict. And while housing conditions have somehow someway managed to just pierce through all of the noise and calamity, whether they will continue to, I think there at least is a question about that. The caution that we have is not going to prevent us from achieving what I think would be acceptable growth goals.

I think also, it is a situation where that, when you buy the land and you own the land, you are taking certain risks. I mean, our business tends to be a lot about who are the buyers, where are the buyers coming from, and when you buy something today, you may not actually be in there selling houses for a year so if those jobs were to go away, if those jobs were to change, also competitive landscape and so forth. So, if you if you buy land today, perhaps probably you are getting cheaper than you will a year or two. But not only do you have carrying costs, you have market risks of what happens to the jobs. What happens to the economic factors, as Bob said. so, we think we can run our business really well. If we can own about a year of finished locks. Then if we can on top of that, own another year or two, and then control on top of that another year or two, that should you give us four or five-years. We think that is a real proven way of running the business.

Is it more difficult to invest in land that you intend to build the smart homes, the smaller homes on. Is it harder to find?

Just depends. Right now we have got a really good pipeline. But we are not the only builder, as you probably know, that is hanging their head on increasing their output of affordable homes. So, it is competitive. But, we have got a really good pipeline.

I have one more questions on, on the finance operations, that your company your division has done very well with low mortgage rates, high mortgage rates, et cetera. Is there any way to make some kind of an acquisition to make this business bigger than the natural growth you are getting by higher capture and stuff in other words, to expand this business at a greater pace given I think your success in return on investment in the past?

Maybe, although that is not something that is part of our current thinking at all. We have done some small acquisitions. Art our entrance to our entrance into Detroit was about a $90 million acquisition a couple years ago. We continue to look at additional markets to enter -.

No I’m talking the finance company.

I missed that.

Yes, I’m sorry.

This is, Derek. We have looked at retail business refinance business. It is a different a totally separate business. We don’t just hang up a sign and do that. And we have decided that we stick to what we do really well. We think with the investment we have and the returns we get from the mortgage and title operations is a good spot for us.

Thank you for everything.

Thank you.

Thank you.

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

So, let me try and ask the land question this way. With the pipeline you have. When might the community count start to inflect back higher? Because, amazing sales this quarter. Sounds like July is doing very well also, I’m just worried about, how quickly you are going to run through the communities. And when based on what you have in front of you right now, when that count might start to turn back higher?

But while Phil is getting ready to answer that, I will simply say this. I think community count is, look, we were giving guidance in two areas. One was land span we suspended that the other was community count, we suspended that. We will probably reinstate both of those at some point down the road. So, the fact that we were giving guidance on community count must make us think as you do that, it is important, but I also think it can be very deceiving. As an example, most of our smart series communities have significantly more single family lots in them then atypical move up or higher price community. I don’t have the exact number, but I would guess that an average smart series community has 150 to 200 lots, some have even more, whereas typical other community might be 50 lots to 80 lots. You know, believing you can skip through with a couple of years. And pace has an impact on that when you look at, when you analyze whether to buy or not to. So, I think that community counts really important. I’m not saying it isn’t, but total lots owned and controlled, and our belief as to whether we can achieve growth goals, I think is at least as important, if not more so. So, given the slight change in the product offering with smart now comprising almost 40% of our business.

Generally I would add is that, I mean, we are in the subdivision business. That is what it is all about. That is how we run the business. And it is a very, very important item for us, echoing definitely what Bob said, all communities are not created equal. The smart series tends to give us higher absorptions, higher profitability, et cetera. We are probably never say never these crazy days. We are probably going to open fewer communities this year than we had thought, obviously with, especially the March and the April craziness in the world. So we are going to probably open less than we thought. Also, if sales continue strong as they have in July, you are going to sell more than we thought. So the community count increase is definitely going to be challenged this year. Having said that, again echoing what Bob said we think we are positioned very well from a land standpoint to continue our growth. You know, if you look at this year, right now we are like a, a 7,000 unit run rate couple of years ago, we were doing 4,000. So in our 15 divisions, you know, as we continue to grow those divisions on average to 500, 600, some might be 800, some might be 400. We still think there is quite a bit of room to grow in our existing 15 markets in the next couple years and then having said that obviously community is very much a part of that. We are buying more land now than we were in the first couple of quarters, because things have kind of picked back up. But again, we feel like we are in good shape to continue growing the business.

Great. Thank you for the information on that. On pricing power, can you talk about what percentage of your communities were able to raise price for the quarter.

I don’t really have, I don’t have a good percentage on that. I mean, we feel good about our margins. We spend a lot of time on opening communities the right way. We try to very much to control communities and don’t get too far ahead of ourselves because, cost protection is always challenging in our business. So we try to run the business. You sell five or six houses. You take the price up even for just 500 bucks or a thousand. So every community is a little different, but we are getting some price and power. You know, you can see that in our margins. And, we will continue to focus on that.

And then two other quick questions first. I know most of the builders were running some incentives in late March and parts of April. Just wondering if you guys are doing any of that, that we should expect maybe could be a small headwind to gross margin as we think about the back half of the year?

You know we don’t give any margin projection. I would not say specifically, we were doing a lot of incentives, right after the pandemic started hitting or whatever, with our sales being so strong, like Bob said, selling 800 plus in May and then beating that in June and continuing in July. We have definitely try inch price up. But the issue you get into is, there are some supply challenges out there, cycle times, I think will probably be a little slower the second half with some of the issues every market is a little different. But, Jay, we are, we are laser focused on margins that is a big part of profitability of our business will continue to be that way.

Absolutely. And you actually, that was going to be my other question is just where cycle times now versus where they were last year?

There are up a couple days if you look, overall company average, more than 140 to 150 range overall. Look at the smart series, they are is a 120 to 130 range, but they are of a couple days compared to last year.

Alright, okay. congrats again and thanks for taking my questions.

Thanks Jay.

We have no further questions from the phones.

Thank you for joining us. We’re looking forward to talking to you next quarter.

This concludes today’s conference call. You may now disconnect.