M/I Homes, Inc. (MHO) Q4 2021 Earnings Report, Transcript and Summary

Hello, and welcome to the M/I Homes Fourth Quarter Conference Call. My name is Elliot, and I will be coordinating your call today. [Operator Instructions] I'd now like to hand over to our host, Phil Creek at M/I Homes. Phil, please go ahead when you are ready.

Thank you. Thank you for joining us today. Joining me on the call is Bob Schottenstein, our CEO and President; Susan Krohne, our SVP and Chief Legal Officer; Derek Klutch, President of our Mortgage Company; Ann Marie Hunker, our VP, Chief Accounting Officer; and Mark Kirkendall, our VP and Treasurer. First to address Regulation Fair Disclosure, we encourage you to ask any questions regarding issues that you consider material during this call because we are prohibited from discussing significant non-public items with you directly. And as to forward-looking statements, I want to remind everyone that the cautionary language about forward-looking statements contained in today's press release also applies to any comments made during this call. Also be advised that the Company undertakes no obligation to update any forward-looking statements made during this call. With that, I'll turn it over to Bob.

Thanks, Phil. Good afternoon, and thank you for joining us today. 2021 was an outstanding year for M/I Homes, highlighted by record revenue, record homes delivered, record income and record year-end backlog. We are very proud of our results. They are a clear reflection of strong macro housing conditions as well as the extraordinary effort put forth by our entire M/I Homes team across all of our markets. The strength of the U.S. housing markets is well documented. Although mortgage rates have recently been on the rise, they remain at or near historical lows. In addition, inventory levels are at or near historical lows. More and more millennials are moving into homeownership. In fact, recent Freddie Mac data suggests that during the past year, the percentage of first time buyers securing a mortgage reached a near 25-year high, approaching 45% fueled by ever increasing millennial participation in homeownership. And we continue to see a shift in buyer preference towards single-family homes and away from more densely populated areas, further driving demand. The quality of our buyers is as good as it's ever been in terms of creditworthiness and down payment. Taken together, all of these factors have created the strongest and highest quality demand for new homes that we've ever seen. It was that way throughout all of 2021 and continues today. At the same time, our industry is dealing with unprecedented challenges in the construction and supply chain part of our business, and we continue to deal with inflationary pressures when nearly all of the materials and components that go into our homes. So far, we have been able to navigate these challenges, although they have had a noticeable impact on our cycle and delivery times. So as we begin 2022, we are dealing with very robust and very healthy housing demand, exceptionally well qualified buyers and persistent construction and supply challenges. Against this backdrop just as we did in 2021, we believe M/I Homes is well positioned to deliver another year of strong performance in 2022. Looking back for a moment at 2021, we achieved record revenues of $3.7 billion, 23% better than 2020. Record pre-tax income of $509 million, 64% better than 2020 and record closings of 8,638 homes, 12% better than 2020. These results contributed to a strong return on equity approaching 28%. Our gross margins were 24.3% or a 210 basis point improvement over last year, and our overhead expense ratio improved by 130 basis points to 10.4% for the year. We also achieved record performance from our mortgage and title operations. All of this resulted in our full-year pre-tax income margin improving by 340 basis points to 13.6%. We sold 9,084 homes during the year, a decline of 4% from the record 9,427 homes that we sold in 2020. Our monthly sales pace during 2021 averaged 4.1 sales per community, the highest pace for any year over the past decade, and this compares to a sale pace of 3.7 homes sold per community on a monthly basis during 2020. We accomplished our sales with an average of 15% less communities during the year and throughout the year, we were limiting monthly sales in roughly half of our communities or more at times in order to best manage construction costs and deliveries. In the fourth quarter, we sold 1,744 homes, a decline of 18% from the fourth quarter record sales that we achieved in 2020. In terms of sales, our Smart Series, which is our most affordably priced product, continues to have a very positive impact not just on sales, but our overall performance. At the end of 2021, our Smart Series homes were offered more than 40% of our communities company-wide, and our Smart Series sales also comprised slightly more than 42% of total company-wide sales in the fourth quarter. This number compares to 36% in the fourth quarter of a year ago. As we continue to grow our Smart Series within our company, it's important to note that our Smart Series communities generally produce on average greater sales pace, better gross margins, better cycle time and better overall bottom line returns. Company-wide, our backlog sales value at the end of 2021 increased by 29% to $2.4 billion, which is an all time year-end record. Units and backlog were up 10% and with the level of 4,835 homes with an average sales price and backlog increasing 17% to a record $490,000. As I mentioned earlier, our mortgage and title operations also recorded strong performance in 2021 with a record number of loans originated record revenue and record pre-tax income for the year of $58.4 million. We ended the year with 175 active communities. This was down 13% from the end of 2020. During the year and we shared this in earlier quarterly calls, we sold out our communities faster than anticipated. Clearly, increasing our community count is a major area of focus. And in that regard, we expect to open a record number of new communities in 2022, growing our community count by 15% by the end of 2022 to more than 200 communities company-wide. Our financial condition is the strongest it's ever been with $1.6 billion in equity at December 31, which equates to a book value of nearly $57 per share. We ended the year with a cash balance of $236 million and zero borrowings under our $550 million unsecured revolving credit facility. This all resulted in an improved ratio of debt-to-capital of 30% compared to 34% a year ago. Now I'd just like to provide a few comments on our markets. We experienced strong performance from our divisions in 2021 with substantial income contributions across the Board led by Orlando, Tampa, Minneapolis, Dallas and Columbus. For the year, new contracts decreased 5% in our Southern region and 2% in our Northern region. For the year, our deliveries, homes delivered increased 9% in the Southern region and 17% in the Northern region. Our owned and controlled lot position in the Southern region increased by 17% compared to last year and increased 2% in the Northern region compared to 2020. We have a very strong land position, highlighted by a number of premier communities and outstanding locations. Company-wide, we own approximately 24,600 lots. Of this total, 31% of the owned lots are in the Northern region with the balance being 69% in the Southern region. This equates to roughly a three-year supply of owned lots. On top of the owned lots, we control the option contract and additional 19,400 lots. So in total, we own and control approximately 44,000 single-family lots, up 11% from a year ago, and this equates to about a five-year supply. Most importantly, about 44% of our lots are controlled under option contracts, which gives us significant and important flexibility to react to changes in demand or individual market conditions. At the end of the fourth quarter, we had 85 communities in the Southern region, down from 112 a year earlier and 90 communities in the Northern region, which was the same as it was at the end of 2020. Before I turn it over to Phil for more financial results, let me just make a few closing comments. Our company is in the best shape we've ever been in both financially and otherwise. We have noticeable operating momentum in all of our markets and are excited about opening up in Nashville later this year. Though the supply chain and construction challenges are likely to persist throughout the year, we begin 2022 with an excellent balance sheet, strong backlog, very robust housing demand and plans to open a record number of new communities. We believe M/I Homes is very well positioned to continue growing our business and look forward to 2022 being a year of continued solid performance. Phil?

Thanks, Bob. As far as financial results, our new contracts in the fourth quarter were 1,744, 18% below last year's record fourth quarter. New contracts were down 14% in October, down 21% in November and down 20% in December. Our sales pace was 3.3 in the fourth quarter compared to 3.5 in last year's fourth quarter, and our cancellation rate for the fourth quarter was 10%. As to our buyer profile about 53% of our fourth quarter sales were the first time buyers the same as a year ago. And in addition, 45% of our fourth quarter sales were inventory homes compared to 43% last year. During the quarter, we opened nine new communities while closing 10 and for the year, we opened 72 new communities and closed 99. We delivered a record 2,316 homes in the fourth quarter and for the year, we delivered 8,638 homes, which is 12% better than the last year and an all time record for our company. Revenue increased 16% in the fourth quarter of 2021, reaching an all time quarter record of $1.1 billion and for the year, our revenue reached $3.7 billion, up 23% from last year, a record annual amount. Our average closing price for the fourth quarter was $443,000, a 14% increase compared to last year and our backlog average sale price is $490,000, up 17% from a year ago. Our backlog average sales price of our Smart Series homes is $388,000. Our gross margins for the fourth quarter were 23.2%, up 20 basis points year-over-year and for the full-year 2021, our gross margin was 24.3% versus the prior year 22.2%. Our fourth quarter and full-year SG&A expenses were 9.8% and 10.4%, a 190 basis point improvement for the quarter and 130 basis point improvement for the year when compared to last year. Interest expense decreased slightly for the quarter and decreased $7.5 million for the year. Interest incurred for the quarter was $9.4 million compared to $10 million year ago and for the year, interest incurred was $39 million versus $42 million in the prior year. We are very pleased with our improved returns for the year. Our pre-tax income was 13.6% versus 10.2% and our return on equity was 27% versus 22% in the prior year. During the fourth quarter, we generated $155 million of EBITDA compared to $127 million in last year's fourth quarter. And for the full-year 2021, we generated $568 million of EBITDA, up 48% over last year. We used $17 million of cash flow from operations in 2021 compared to generating $168 million in 2020, cash flow was impacted by higher land spend in 2021. We have $24 million in capitalized interest on our balance sheet about 1% of our assets and our effective tax rate was 20% in the fourth quarter compared to 21% in last year's fourth quarter, and our annual effective rate for 2021 was 22% compared to 23% for 2020. Our fourth quarter annual tax rate benefited from energy tax credits from prior years. And our earnings per diluted share for the quarter increased 41% to $3.83 per share from $2.71 in last year's fourth quarter and increased 61% for the year to $13.28 per share from $8.23 per share last year. During the quarter, we repurchased 600,000 of our outstanding common shares for $36 million, bringing our total share repurchases up to $52 million for the year that leaves $48 million available to our current repurchase authorization. And our current plans based on existing market conditions are to continue repurchasing shares. Now, Derek Klutch will address our mortgage company results.

Thanks, Phil. In the fourth quarter, our mortgage and title operations achieved pre-tax income of $10.8 million, down $4 million from 2020 and revenue of $22.9 million, down 10% over last year, primarily as a result of lower pricing margins. For the year, pre-tax income was $58.4 million and revenue was $102 million both all time records. The loan to value on our first mortgages for the fourth quarter was 82% down from 2020's fourth quarter of 83%. 81% of the loans closed in the fourth quarter were conventional and 19% were FHA or VA compared to 74% and 26% respectively for 2020's same period. Our average mortgage amount increased to $360,000 in 2021's fourth quarter compared to $319,000 in 2020. Loans originated in the quarter decreased 3% from 1,746 to 1,692 and the volume of loans sold increased by 19%. Our borrower profile remains solid with an average down payment of almost 18% and for the quarter, the average borrower credit score on mortgages originated by M/I Financial was 749 compared to 751 last quarter. Our mortgage operation captured 83% of our business in the quarter down from 85% in 2020'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 no borrowings under our unsecured revolving credit facility. Total homebuilding inventory at year-end was $2.5 billion, an increase of $536 million above prior levels. During 2021, we spent $630 million on land purchases and $422 million on land development for total land spend of $1.1 billion. This was up from $733 million in 2020. At December 31, 2021, we had $682 million of raw land and land under development and $423 million of finished unsold lots. We own 5,700 unsold finished lots with an average cost of $74,000 per lot and this average lot cost is 15% of our $490,000 backlog average sale price. In 2021, we purchased 16,900 lots compared to 2020's 11,500 lots. Our goal is to own a two to three-year supply of land, and we feel very good about our strong land position. At the end of the year, we had 99 completed inventory homes about one per community and 1,266 total inventory homes. And at December 31, 2020, we had 225 completed inventory homes and 1,131 total inventory homes. This completes our presentation. We will now open the call for any questions or comments.

Thank you. [Operator Instructions] Our first question comes from Jesse Lederman from Zelman & Associates. Jesse, your line is now open.

Hey. Thanks for taking my questions. My first question pertains to the sequential decline in gross margin. I'm assuming part of that impact was from peak lumber flowing through. I just want to understand the moving pieces here and whether there are other mix impacts, and if the margin of homes in your backlog is stronger than those that you delivered during the fourth quarter?

To answer the first part of the question, yes, we did get more impact from lumber in the fourth quarter. Overall, we're still pleased about the strength of our margins. We don't really give any margin guidance, but we are focused every day on continuing to have strong margins. If you look at it from the cost side, in the fourth quarter, it looks like our sticks and bricks went up 3% or 4%. Markets are a little different. Prices or costs have been moving up a little bit this year also. But again, we feel very good about where we are from a pricing standpoint, et cetera.

Yes. I just would like to add something. Is your first name Jesse?

Yes.

Jesse, it's nice to meet you. I'm not sure we've spoken before. So this is Bob Schottenstein. The only thing I'll add to what Phil said is that we were very pleased with our margins for the year, with our growth in our margins. And I just want to underscore that as we look at our backlog and where we sit today, we feel really good about the return profile for the year.

Awesome. Thanks for that. And nice to meet you, too. Second question is more so a little bit higher level. Has the increase in rates or anything you're seeing on the ground today change the way you're thinking about price increases or your ability or willingness to push price? I remember last quarter, you mentioned you were raising prices in about 15% to 35% of your communities. And I'm just wondering how you're thinking about pricing at this point in time?

Well, a couple of things on that. First of all, it's something that you react to every single day. And if you decide not to pay attention to it for a week or two, you may be dealing on that data. A year ago, if you would have said to me, what do you think is going to happen if rates go from whatever they were, then roughly 3% to banging on the door 4%, I would have said it's going to have an impact on demand, and I would have been wrong. And so with that comment made, as I said in my opening remarks, when you look at all the factors together on the demand side of our business, these are the best and healthiest conditions I've ever seen and we've ever seen. And it was that way as we ended last year, and it remains unabated today. If you look at the down payment, the credit scores, Derek Klutch, the head of our mortgage operations, spoke about our average down payment being in the 18%, 19%, then you take into account how many of our buyers are utilizing FHA. Those that are going conventionally are probably putting over $100,000 down on average. It's a big number. And we're very encouraged by that. The levels of inventory, as you know, you guys follow this as close as anyone. The levels of inventory across the markets we do business in, and I'm fairly certain it's this way everywhere. I've never seen it this low. I'm talking about used home listings. Most of the markets we're in the listing levels today are lower than they were even a year ago, and they were at historic lows then. You basically can't find a house. And the millennials continue to move from renting to owning. The latest data I referred to from Freddie Mac, I found very compelling. It was the high – the 45-or-so percent of all the mortgages secured were first-time buyers. And so much of that was fueled by the large population of millennial households that are going from the rent to the owned side. Having said all that, we're going to keep raising prices where we can. If we weren't limiting sales, we would be selling a whole lot more homes every month. We're limiting sales today in just under half of our communities and that's all about deliveries and managing cost and managing – trying to manage pricing. But having said that, if rates continue to go up, up and up, I guess you and others believe that that's going to have a pretty chilling impact on demand, and you might be right. We haven't seen it yet. You've got to come down somewhere. We're much more optimistic about the business and our good friend, IV and her cohorts are. And we'll see. I mean, we've never had a crazy long land position. We've always managed pretty conservatively. We pressure test our backlog pretty regularly with various rising rate assumptions. We think it's in great shape. Super, super excited about all the new communities we've got coming on later this year. As I talked about, our community growth could be right around 15% or more for the year. Hopefully, it will be more. But the delays associated with home construction have found their way into the opening of communities too. So everything has been stretched out. But if you want to – there's never been a better time to sell a home, and there's never been a more difficult time to build one. But we'd rather have it that way than the other way obviously, or the tone of this call would be radically different. So that's sort of how we see things, Jesse.

I appreciate the time. Thanks so much and congrats on the quarter.

Hey. Thanks a lot.

Our next question comes from Alex Barron from Housing Research Center. Alex, your line is now open.

Yes. Thanks, guys, and great job on the quarter and for the year.

Thanks.

I wanted to congratulate you on buying back your stock here because I think that's a bit different than in the past. And I just wanted to get your current thoughts around further share buybacks given the stock is sitting here below 1x book and around 3x earnings. Just can you share how you guys are looking at that going forward?

Yes. Alex, appreciate the comment. As I said in my previous comments, we do plan on continuing to buy shares back. We've been very pleased with our earnings, book values up to $57 a share. It was – the stock was at $75 the middle of last year. So we did buyback about $50 million of shares last year, and we do plan on continuing to buyback shares.

But I'm saying, are you guys looking at it depending on the valuation itself or is this more of a systematic thing you'll be doing every quarter going forward?

Alex, that depends on a lot of factors as I’m sure, you know. We are focused on growing the business. As Bob said, we're opening a lot of new stores. We're focused on continuing to grow our bottom line, our units and so forth, but we think we can do all those things, including buy shares back. But again, that just depends on market conditions, demand out there, how fast we can get houses built through the system and those type of things.

Got it. Another question, Phil, your SG&A was better not just in percentage terms, but even in dollar terms than a year ago, despite the increase in the revenue. So I'm curious, what contributed to that saving especially in the corporate side?

Alex, that's something we've been working on for a long time. Our scale has improved when you look at our now 16 housing divisions counting Nashville. We're just getting better scale in our operations. Our headcount is up today about 9%. Obviously, our revenue for the year was up over 20%. So we've been able to get the benefit of scale, which we've been working on so long. We were really, really excited to see those SG&A percentages come down, again, been spending a lot of time on that. There's always a few things quarter-to-quarter, incentive is kind of recorded based on when we make the money. And so every year is a little different as far as which quarters you tend to make the money or whatever, but nothing real big in there. But again, we're very pleased with the scale we're getting.

Just to underscore what Phil said, Alex. So much of SG&A is really controlled by scale. And obviously, it's not a 100% controlled by scale. We have – there's things we can do to hopefully to be prudent, when it comes to expense management. But sort of what – how I think about it, our revenues are around $4 billion. I go back and look at some of our bigger competitors and see what their SG&A levels, like when they were doing $4 billion in revenue. And then I see what ours are today. And quite honestly, in most cases, ours are lower. Maybe I like when I look at that, stated differently if our revenues were $8 billion, I would expect our SG&A to be noticeably lower as a percentage than it is today.

Okay. If I could ask one more?

There are things we can control and we're constantly looking for ways, whether it's on selling commissions or all kinds of overhead to control that even further. It's been a very intense area of focus for us for the last, frankly, almost eight years.

No, that's great to see the progress. If I could ask one more on the tax side, it looks like your tax rate was a bit lower this quarter. Was there some one-time tax credit or anything that contributed to that?

Phil, you want me to address that?

Sure. Go ahead.

Yes. It's the energy tax credits. We had a change in estimate when we shooted up for our 2018 and 2019 returns. So that's reflected in the 2021 tax rate in the fourth quarter.

Thank you very much. All right, guys. Well, best of luck for this year.

Thanks.

Thanks, Alex.

Our next question comes from Jay McCanless from Wedbush. Jay, your line is now open.

Hey. Good afternoon, guys. Great year.

Thanks, Jay.

Sticking on tax for a minute. So…

Good to talk to you.

Yes. Absolutely. Sticking on tax, what rate should we use for 2022?

24%.

Okay. Thank you.

Jay, did you hear Ann Marie?

Yes. 24%.

Yes. We're in different locations and I just wanted to make sure you heard Ann Marie.

Yes, little higher than the current rate, Jay. We're thinking maybe 23%, 24%, something like that.

Okay. Sounds good. Excited and thank you for giving us the details around community growth. How do you expect that to flow through the years? Is it going to be back loaded or pretty consistent through each quarter?

Back loaded. We thought it would be a little bit more consistent, but it's going to be back loaded. But we'll start to see the effects of it. I think begin to take shape here little-by-little in the first half, and then pick up steam in the second half.

One of the things also Jay, is that, we did close 99 stores in 2021. We don't expect to close out that many stores next year. Also, as Bob said, we intend to open a record number. So hopefully that gets us to around a 15% higher number by the end of the year. So we're really excited about that.

And 15% higher just off the 176 you had at the end of 4Q I believe once that we thought.

Yes. I think what I said is we look to have – yes, we should – yes, Jay, we should have, hopefully 200 or more communities open and operating by the fourth quarter.

Yes.

Okay. And then if we look at cycle times, what did those do during the quarter and how did that compare to 3Q and maybe 4Q 2020?

If you look at cycle times in the fourth quarter of 2021, it was up about 60 days from the fourth quarter of 2020. It kind of just got a little worse as the year went on. The fourth quarter was a few days worse than the third. Our current view, Jay, is that, I mean, we're working hard to make it better, but we're thinking realistically, it may not get any better. But we're still hoping, planning on having a record year in many ways. We do have some tough sales comps in the first quarter of last year. We sold over 3,000 houses. Had a tremendous first quarter sales. But again, we're hoping to have a record year in many ways.

Absolutely. I mean, on the supply chain, is it strictly just the suppliers not being able to get enough goods or is it a little bit more tightness on the labor side or…

It's everything at one time or another. I don't think there's one component or one part that has been immune from some irritating slowdown during the last 12 months. The only good news is they all haven't happened on the same day at the same time. I don't know, I was listening to one of the other builders, it's like that. I think they use the whack-a-mole term. Its cabinets one month, it's appliances the next then appliances gets fixed and then it's duct work, then something else then it's pipe, then you can't find paint, then you can't find brick, but you can find brick here, but you can't find it there. It's just one thing after another. And the only good part about all of it is it's against the backdrop of I think, some of the best demand our industries ever seen.

Absolutely. I won't ask you for numbers in January, but did you maybe talk about what you're hearing from the field in terms of either pushback around the higher rate or people maybe trading down to a little bit lower square footage?

What I said in my opening comments, which I'll repeat is that throughout all of 2021 demand was as good as we've ever seen and that continues today. So far, we've seen no pushback on rates. And I think that in terms of product selection, square footage, no, nothing meaningful there. I think it's pretty apples-to-apples from a year ago. The only difference is we have a few more Smart Series communities now than we did. So that would skew, but that's not a change, that just means there's more affordably priced product being offered. And the fact that it's more affordably priced is oftentimes related to the size.

Do you think Bob you're going to get Smart Series?

It's not a buyer deciding to buy a 2,400 square foot house instead of a 28 because of interest rates. We've not seen that yet.

Okay. Where do you think as a percentage of total community Smart Series could be by year-end?

I think it's going to be around that mid-40s. It's been going up about 4% to 5% a year since 2016 when it was like one community. And now its – last year at this time, it was in the mid-30s. I think last year at this time, we said – we thought it could get to the 40s. It's now a little bit over 40. I think it'll go up another 3%, 4%, 5% here. Everything is selling that we're building. And we don't want to become, we don't want to – we don't need to put all our eggs in one basket and we don't tend to.

Jay, we've also been pleased at – we have been able to start more houses. We started about 9,500 houses in 2021, and in 2020, we started about 8,600. So we started almost a 1,000 more houses. Again, they're at different stages of construction, et cetera. But even with all the issues going on, we have been able to get more houses in the field. We do have a few more spec homes out there, not only backlog homes that are in the field. So we do feel good about where we are. Again, there's always some issues quarter-to-quarter in this crazy world, but we feel like we're in really good shape going into this year.

Yes. It’s great to see those numbers going up. And I know you said earlier that you've got sales caps on it about 50% of the communities, but could you talk about what percentage of communities you're able to raise price in 4Q?

I don't have that specific.

That's a really hard number because it's a subdivision by subdivision basis. I mean, overall, our average sale price continues to go up on a monthly basis. We talked about it being 490 in backlog and the average sale price in backlog of Smart Series is 390. So we're pushing price everywhere we can. Not really having any significant appraisal issues, not really having any customer pushback, the backlog is very strong over 5,000. So we just continue managing it as best we can. We just don't want to get too far ahead of ourselves. I mean, lumber is kind of gotten back up again. And like Bob said, there's always things happening. So it's just something you got to manage every day.

Yes. I mean, one of your competitors earlier said that rising lumber prices probably start to hit a little bit on the gross margin in the back half of the year. I mean, you guys doing every – most of the homes build to order, would you say that's probably a safe assumption with the homes that you're selling there?

Yes, pretty much. I mean, the way our business is now, Jay, every market is a little different, but we pretty much got to get the houses in the field by April or May to get them closed. And in most situations from the time it starts, it's like, 50 to 100 days before you get the lumber out there and so forth. So yes, I would guess it's going to be some in the third, fourth quarter or whatever. We have been trying to build in a higher contingency amount for things in general, things like lumber when they go up, but it's definitely been a challenge.

Got it. And then one other question for me on the mortgage side. I know the capture rate was down a little bit. Just wondering what we've seen with refi starting to drop off, are you all seeing more competition for purchase mortgages. Is it harder to get people to want to go with M/I for their mortgage? Just would love a couple comments on that from Derek?

Yes. Sure. Absolutely, Jay. Yes, we did see the capture rate drop and it's exactly what you mentioned. Refinanced business went away. The other lenders that were doing the refi business didn't go out of business – didn't shut their doors, they're coming after ours. So it is more challenging. Every contract we write, we're competing with more and more outside lenders for that business. So it’s going to be a more difficult year for capture rate coming up.

And what about margins?

And pricing margins, we also saw that, we're having the price more aggressively to compete with those lenders for the business.

Our goal is to have an 85% capture rate. That's our clear internal goal. And it's a goal that we hope to achieve, but we did see a little movement late last year.

And you saw it in our results last year, Jay, the mortgage company results last year in the first half bottom line were a lot better than the second half. And again, that was just all due to margin pressure on the bottom…

And it's interesting because without getting into too much of the weeds, some of our – we have an M/I Financial branch, if you will in all of our divisions. And in some of those branches, our capture rate is in excess of 90%, probably about a third of them. So you can say, well, if you can do it there, why can't you do it in all of them though they all have the same competitive issues. The answer is yes. But sometimes also relates to the type of product that we offer in that particular city. Where there's more Smart Series, you might have an opportunity to have a higher capture rate, for example. Then if you have more move up first or second time where that buyer may have previous banking contacts or who knows what. But our goal is to be at 85% or more everywhere.

Got it. One other one that popped in, and then I really will give it up. Any evidence of competitors using incentives, whether it's an extra $1000 on closing costs, people trying to buy down mortgage rates, are you seeing any evidence of that in the field from your competitors?

Not yet. No, not yet. I mean, we've looked at buying down rates, but it doesn't seem to make economic sense yet. But no, we've seen nothing, which is a good thing.

Okay, great. Congrats.

I would be shocked and disappointed if we saw it.

Got it. Well, congrats again. Thanks for all the time.

Okay. Yes. Thanks.

Thanks, Jay.

[Operator Instructions] Our next question comes from Adam Starr from Gulfside Asset Management. Adam, please go ahead.

Hello. Congratulations on a very good year and thank you for taking my question. I'm just wondering what kind of – can you hear me okay?

Yes. You're great. Thank you.

Okay. I'm wondering what kind of future pricing assumptions are you making when you price and build land. How are you underwriting it? Do you see continued price increases? Are you holding at kind of today's level? Just provide some color on that? Thank you.

Yes. The underwriting really – that's a great question. And it's one that we think about a lot, frankly, right now. First of all, the land market is unbelievably competitive. If you stumble on to a piece that there's not a lot of demand for, you probably don't need to do any underwriting, you just walk away from it. But the good piece is there's intense demand. And for the most part, we really haven't changed our underwriting in quite some time. We have minimum rates of return thresholds, and we take the conditions as they are today. We don't assume any inflation on the pricing side or on the costing side with one exception. And on deals that we're internally developing, we have been incorporating greater and greater contingencies due to the likely inflation that we'll see on land development, site work and pipe and street improvements. So other than trying to build a little bit more inflation on land development deals just because we think those are longer and more risky, we're pretty much saying the conditions as they are today is the way we want to analyze it. And even with that said, there's a lot of intuition and it's not just like arithmetic and you type it into a computer and you say yes or no. There's an awful lot of conversation, particularly on larger deals, the larger the deal, the more concern about price point, the larger deal, the more concern about the time you might be in it, the larger the deal, the questions that might come up about, should we look to sell off a part of this or bring in a partner and split the lots, all kinds of factors way into any land deal that go well beyond what is a pretty, I think, appropriate and rigorous underwriting process.

Thank you very much. Appreciate the answers.

Thanks.

Our next question comes from Art Winston from Pilot Advisors. Art, your line is now open.

Thank you very much for a great year for our stockholders, great results.

Thank you.

I have two questions. You commented that approximately 70 places were opened already in 2021, 20 new ones. And I wonder if you could comment at all how it's progressing in relation to prior openings and what you might have anticipated very generally?

Hey Art, it's Phil. As far as 2021, we opened 72 stores at the first of last year, we kind of thought we would be north of 80. So we did open a few less last year than we thought. This year, as we said, for 2022, we expect to open a record number. That is something we track constantly. And so far, we're on target to get all of those communities open. It's something we revisit all time. It's so important to us.

And I think you also asked, Art, this is Bob Schottenstein. I think you also asked –

Hi, Bob.

Hi. How do those – you wanted to know how those communities have done. Is that correct?

In relation to what you had anticipated and openings in prior years, very general.

Yes. We're getting pretty good grades. Almost all of them are performing at or above plan.

Yes. We track every month, every store that opens and how is it doing versus what we approved it at. So as Bob said, we're very pleased with that.

Excellent. My last question, I think it's terrific that you're sustaining your underwriting standards with some caveats, as you mentioned for the last question. Is it possible or probable that the amount of land that you purchased this year and lots that you purchased could be flat or down as opposed to being up compared to 2021?

No, Art, the way it looks, we expect to spend more this year on land development than we did last year. As far as actual purchases of lots, yes, it could be less than what we did last year.

There's about three or four or five factors you got to look at because even if you did exactly the same number of lots, not all lots are the same, a 50-foot lot might be worth X, a 60-foot lot might be worth X plus 10%. And if you do the same number of lots, but there's more 50s or 60s, you're going to spend more. There's clearly been inflation on land development. So even if you develop the same exact number of lots this year as last year, it's going to cost more. So if you shake all that out to underscore Phil's point, whereas land spend likely could go up, amount of lots purchased could trail off.

That's…

Certainly not enough to steer the future. But we're – when it's taking longer to get things through the system, we're trying to take that into account with what we've got coming up.

I mean we still like to stay in the area of owning two to three years of current closing rates. And Bob talked about at the end of 2021, we owned about 25,000 lots. Of course, our closing rate this past through it a little 9,000. So we were a little bit south of 3%, which is good. So that's kind of an overall thing we try to watch. Smart Series in general tends to be a little bigger communities, a few more lots. Also, almost all of the Smart Series communities, we tend to develop the land also. So again, I do expect the land development spend to go up this year. But the number of lots we've got, like Bob said, may very well come down.

It sounds like the land that you have under option, but don't know the lots you have under option, but do not own aren't as big a factor as that when you own it sounds like. Is that true?

A factor in what? I want to make sure I understand...

In other words, you have five years worth of lots that you own and have under option, but you only related to the ones that you own in your last comment.

Well, the risk is definitely more on the ones you owned. So we don't want to get too far out. The issue with getting too far out is where are the jobs, what are the income levels, what's the competitive landscape? If you start buying land today that you can't consume for four or five years, you're taking market risk and a lot of other risks. So again, we'd like to kind of be a little bit short in that two to three-year supply of what we actually own.

I mean the demand for housing continues to be very strong, as we've said a couple of times, notwithstanding rates going from roughly 3% to almost 4%. If the demand had dropped off by 10% or 15%, then it hasn't, but if it had, we might start looking at some of those deals we have under option. I can't say which ones. But hypothetically, we would probably be – have been looking at things, and that would – that's the kind of thing that we're constantly focused on. As soon as you start to get the first sign of sales slowing, usually, that's not a false positive. That usually tells you something, and we've not seen any of that yet.

Okay. Thank you very much.

Yes. Thanks, Art.

We've come to the end of our Q&A. I will now hand back to the management team for closing remarks.

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

This concludes today's call. We thank you for joining. You may now disconnect your lines.