M/I Homes, Inc. (MHO) Earnings

Management highlights

- Overall Financial & Sales Performance * Delivered solid results amid broader economic challenges including choppy demand, rising interest rates, and Middle East conflict uncertainty * Achieved a 10% pre-tax income margin and 10% return on equity for Q2, which management views as strong for the current market environment * Record Q2 new home sales, with monthly sales pace of 3.4 homes per community, up from 3.0 per community YoY * Cancellation rate for Q2 was 8%, a low, stable level * 78% of Q2 sales were spec homes, flat sequentially from Q1 - Land & Inventory Position * Company-wide holds 23,500 owned lots (a 2.5-year supply) and 25,700 controlled lots via option contracts, for a total of ~49,200 lots (a 5-year total supply) * Total unsold land investment was $1.9 billion at quarter-end, consisting of $800 million in raw/under-development land and $1.1 billion in finished unsold lots * Total completed inventory homes stood at 510, down from 586 YoY, with total inventory of 2,839 homes, up slightly from 2,726 YoY * 42% of Q2 home deliveries were spec homes sold and closed within the same quarter - Balance Sheet Strength * S&P upgraded the company's credit rating to BB+ * Ended the quarter with an all-time record $3.2 billion in total equity, for a book value per share of $128, an $11 increase YoY * Held $736 million in cash with no borrowings on the $900 million unsecured revolving credit facility, resulting in a 18% debt-to-cap ratio and negative 1% net debt-to-cap ratio * All debt maturities are not due until 2028 or 2030, with all interest rates below 5% * Repurchased $50 million of company stock in Q2, with $120 million remaining under the current repurchase authorization; 19% of outstanding shares have been repurchased since 2022 - Market & Product Strategy * Mortgage rate buydowns remain the primary customer incentive, and will continue for the foreseeable future, with targeted programs for both spec and to-be-built homes (to-be-built includes longer-term rate locks) * Most buyers remain high credit quality, with an average credit score of 748 and 15% average down payment * The company is on track to grow its 2026 average community count by approximately 5% YoY, ending Q2 at 234 total communities, consistent with YoY * Newer markets Nashville and Fort Myers-Naples are gaining traction and expected to contribute meaningfully as scale grows; top performing markets currently include Columbus, Chicago, Minneapolis, Raleigh, and Charlotte, while Tampa and Sarasota face current macro-driven challenges * Management has strategically prioritized move-up home locations over the past 18-24 months, as these opportunities have penciled better in underwriting, particularly for infill sites

Guidance

- Management maintains its prior target of 5% YoY growth in 2026 average community count, and expects solid full-year 2026 results across the vast majority of its markets - No formal full-year gross margin or earnings guidance was provided; management stated it will continue to focus on cost controls, high-quality community locations, and maximizing margins where possible - Management reaffirmed confidence in long-term homebuilding industry fundamentals, and expects newer markets Nashville and Fort Myers-Naples to move from current earnings drag to positive contribution as they scale

Segment performance

Home Building Segment: Q2 2026 revenue was $1.1 billion, down 9% year-over-year (YoY). Pre-tax income was $105 million, down 35% YoY, equal to 10% of revenue. 2,206 homes were closed, down 6% YoY, with 2,387 new home contracts (a new Q2 record) up 15% YoY. By product line: the entry-level Smart Series accounted for 43% of total sales, down from 52% YoY, with a slight shift toward move-up product. By region: Southern region represented 60% of total home deliveries, and holds 60% of the company's total owned and controlled lots; Northern region holds 40% of total owned and controlled lots, with a 24% YoY increase in lot count compared to a 15% YoY decrease in the Southern region. Gross margin for the segment was 22% including $4 million in inventory charges; excluding charges, gross margin was 22.5%, a slight sequential improvement from Q1. Mortgage Segment: Pre-tax income was $14.4 million, flat YoY compared to $14.5 million in Q2 2025. Revenue increased 3% YoY to $32.3 million, driven by higher average loan amounts and slightly higher margins on sold loans, offset by a 3% YoY decrease in originations. The segment achieved a record 96% capture rate of the company's home buyer mortgage business, up from 92% YoY. Average loan size increased to $405,000 from $403,000 YoY, and average loan-to-value was 85% up from 83% YoY.

Risks & headwinds

- Ongoing high mortgage rates continue to suppress overall housing demand, keeping the current home buyer pool relatively constrained, and increase the cost of mortgage rate buydowns, creating margin pressure - Unforeseen macroeconomic and geopolitical uncertainty (including ongoing Middle East conflict, unexpected oil price volatility, and unanticipated interest rate moves) that could negatively impact consumer sentiment and housing demand - Performance varies across markets: Tampa, Sarasota, and Austin are currently facing weaker performance driven by macro conditions - Competitive discounting from other homebuilders in some markets can negatively impact industry pricing and overall sales performance - Land deal underwriting has inherent uncertainty due to long lead times between purchase and community opening, with multiple unpredictable factors (including future interest rates, economic conditions) that can impact project returns

Analyst Q&A

• Q: What is driving the shift in mix toward more move-up product this quarter: strategic targeting, site opportunities, or demand shifts?

  A: The shift is a combination of slightly higher natural demand for move-up homes and strategic targeting that the company has pursued for 18-24 months. In select markets, move-up land opportunities have better underwriting returns, especially for infill sites that the company views as opportunistic, so the company has prioritized these acquisitions.

• Q: What are the biggest risks management sees for the second half of 2026 and into 2027, given current stable margins and strong order growth?

  A: The main risk is unforeseen macro and geopolitical events that cannot be predicted at this point, which could further constrain already limited housing demand. Competitive discounting by other builders in some markets also creates pressure, though management notes current industry balance sheets are the strongest they have ever been, and MI Homes is well positioned with a strong balance sheet to weather any challenges. Only a small number of the company's markets are currently underperforming due to macro conditions, not internal missteps.

• Q: What is driving the 24% YoY increase in Northern region controlled lots and Southern region decline, and is this a deliberate regional rebalancing strategy?

  A: The overall lot supply target of 2-3 years owned and 4-5 years total controlled has not changed, and the small shift is not a deliberate top-down regional rebalancing to a 50/50 split. Growth targets are set market-by-market based on local opportunities, not broad region preferences. The company is seeing more finished lot opportunities across all markets from sellers, other builders, and land bankers, and will take advantage of attractive deals as they arise.

• Q: What current average mortgage rate are buy downs bringing customers to, and how does the company approach incentives?

  A: Currently, government programs for spec homes are priced slightly below 5% for 30-year fixed mortgages, while conventional rates for spec and longer-term locked to-be-built homes are slightly above 5%. The company tailors incentives to individual communities and buyers, offering more closing cost support for affordable entry-level communities and a range of loan products to fit buyer needs, rather than a one-size-fits-all shotgun approach.