M/I Homes MHO Q2 2025 Earnings Call Transcript

Image source: The Motley Fool.

DATE

Wednesday, July 23, 2025 at 10:30 a.m. ET

CALL PARTICIPANTS

Chief Executive Officer and Chairman — Robert H. Schottenstein

Executive Vice President and Chief Financial Officer — Philip G. Creek

President, M/I Financial and Senior Vice President — Derek Klutch

Need a quote from one of our analysts? Email pr@fool.com

RISKS

Gross margin (GAAP) declined 320 basis points year over year in Q2 2025 and declined 120 basis points sequentially, due to strategic use of mortgage rate buy downs and ongoing cost pressures.

New contracts decreased 8% year-over-year in the second quarter, with management citing “continue to face challenging and choppy conditions primarily due to higher interest rates which have contributed to uncertainty and impacted consumer confidence.”

Operating expenses rose 7% versus last year in Q2 2025, with higher community count and headcount contributing to increased SG&A, at 11.3% of revenue compared to 11% a year ago.

Earnings per diluted share dropped 14% to $4.42 from $5.12 last year for Q2 2025, driven by margin contraction and lower pretax income.

TAKEAWAYS

Revenue: $1.2 billion total revenue for Q2 2025, a record for the second quarter, representing a 5% increase compared to a year ago.

Homes Delivered: 2,348 units delivered in Q2 2025, up 6% year-over-year and a record for the quarter.

New Contracts: New contracts decreased 8% compared to the same quarter last year.

Gross Margin: 24.7% gross margin for Q2 2025, down 320 basis points year-over-year and 120 basis points compared to the first quarter of 2025.

Pretax Income: $160.1 million pretax income for Q2 2025, a decrease of 18% compared to a year ago, with pretax return of 14% for Q2 2025.

Return on Equity: Return on equity was 17%.

Book Value per Share: $117, up 17% compared to a year ago, with record $3.1 billion in equity for Q2 2025.

Community Count: 234 communities as of Q2 2025, an 11% increase from 211 last year; guidance for a 5% increase in average community count in 2025 compared to 2024.

Regional Performance: Northern region new contracts increased 13% in Q2 2025; southern region new contracts decreased 4%.

Lot Position: 24,500 owned lots and 26,000 controlled via option, totaling 50,500 lots as of June 30, 2025 equating to five to six years of supply.

Cash Position: $800 million in cash and zero borrowings under the $650 million unsecured revolving credit facility.

Debt to Capital: 18%, down from 20% a year ago; net debt to capital ratio of negative 3% for Q2 2025.

Mortgage Operations: Originated 1,865 loans, up 15% from last year, with 92% mortgage capture rate for Q2 2025 and average loan amount of $403,000 for Q2 2025.

Incentives: Rate buy downs identified as the primary incentive with limited additional promotional activity.

Inventory Homes: 73% of sales were inventory homes in Q2 2025; 36% of deliveries were spec sales closed in the same quarter.

SG&A Expenses: 11.3% of revenue for Q2 2025; absolute expense growth tied to expanding store and community count and headcount additions.

Land Investment: $1.7 billion in unsold land as of Q2 2025, with $894 million raw/under-development as of June 30, 2025 and $803 million finished unsold lots as of June 30, 2025.

Share Repurchase: $50 million spent on share repurchases in the second quarter of 2025; $150 million remains authorized, with 14% of shares repurchased since the start of 2022.

Interest Income (Net): $4.4 million for Q2 2025; Interest incurred was $8.7 million.

SUMMARY

Second-quarter results revealed records in revenue and home deliveries forM/I Homes, Inc.(NYSE:MHO). These were offset by declining gross margins and lower pretax income (GAAP) as management prioritized market share through targeted mortgage incentives. Increased cash holdings and a reduced debt profile were highlighted, supporting sustained expansion of community count and land inventory. The company achieved a notable rise in inventory homes sold, with 73% of sales coming from this channel, reflecting a strategic pivot in response to rate-sensitive buyers.

Schottenstein said, “we continue to face challenging and choppy conditions primarily due to higher interest rates which have contributed to uncertainty and impacted consumer confidence.”

The proportion of government-backed loans rose to 49% of mortgage closings in Q2 2025, up from 31% in Q2 2024.

Phil Creek noted that SG&A expenses will likely continue to increase with further store and community growth projected for the second half of 2025.

Geographic diversification was emphasized as an ongoing strategic advantage, with company leadership reiterating no current intent to further expand westward beyond existing markets.

INDUSTRY GLOSSARY

Spec Homes: Newly built homes constructed without a specific buyer, sold from existing inventory to meet market demand for quick move-in.

Mortgage Capture Rate: The percentage of homebuyers who use the builder's in-house mortgage services for their purchase.

Full Conference Call Transcript

Bob Schottenstein: Thanks, Phil. Good morning and thank you for joining us. As outlined in today's release, M/I Homes had a very solid second quarter highlighted by record second quarter revenue, record second quarter homes delivered, and continued strong returns including 25% gross margins, 14% pretax income, and a 17% return on equity. We were very pleased to post these results given the challenging macroeconomic backdrop. When we last spoke on our first quarter earnings call, we commented on the demand challenges we faced during 2024 as well as during the first quarter of this year.

Little has changed as we continue to face challenging and choppy conditions primarily due to higher interest rates which have contributed to uncertainty and impacted consumer confidence. Throughout this year, we have strategically and effectively used mortgage rate buy downs to drive traffic and incent sales. Though such buy downs have impacted profitability and margins, they have been most successful as we strive to balance price and pace across our 234 communities. Though our second quarter new contracts were down 8% from a year ago, we were pleased to record a monthly sale pace of three homes per community. And moreover, we were pleased to see a sequential improvement in new contracts from May to June.

We have repeatedly said that long-term fundamentals of our industry are sound and that housing will benefit greatly from the current undersupply of homes and growing household formations, particularly in our markets. There's little doubt that many potential buyers are sitting on the sidelines waiting for a better rate environment and an improvement in consumer sentiment. As we go forward, we will continue to use rate buy downs to drive traffic as we manage our operations to meet the demands of the current environment. We feel very good about our business and believe that we can continue to drive performance and produce solid returns and profitability.

In the second quarter, we closed a record 2,348 homes, a 6% increase compared to a year ago. Our second quarter total revenue, also a record, increased by 5% to $1.2 billion and pretax income decreased 18% to $160.1 million largely due to the decline in gross margins to 25%. But still, a very good 14% pretax income return. We continue to see quality buyers in terms of creditworthiness with strong average credit scores of 746 and an average down payment of 17%. We ended the second quarter with a record 234 communities and remain on track to grow our community count in the balance of 2025.

We believe our 2025 average community count will increase by about 5% from 2024. Our division income contributions in the second quarter were led by Columbus, Dallas, Orlando, Chicago, Minneapolis, and Charlotte. New contracts for the second quarter in our northern region increased by 13%, while new contracts in our southern region decreased 4%. Our deliveries in the southern region increased by 8%, deliveries in the northern region increased 2% from a year ago. 59% of our deliveries come out of the southern region, the other 41% out of the northern region. We have an excellent land position.

Our owned and controlled lot position in the southern region increased by 7% compared to a year ago, and decreased by 7% versus last year in the northern region. 31% of our owned and controlled lots are in the north, the other 69% in the south. Companywide, we own approximately 24,500 lots which is slightly less than a three-year supply. In addition, we control via option contracts approximately 26,000 additional lots resulting in a total of 50,500 owned and controlled lots equating to about a five to six-year supply. Our balance sheet is the strongest in company history.

We ended the second quarter with an all-time record $3.1 billion of equity equating to book value per share of $117 which is up 17% from a year ago. We also ended the quarter with zero borrowings under our $650 million unsecured revolving credit facility and $800 million of cash. This resulted in a debt to capital ratio of 18% down from 20% a year ago and a net debt to capital ratio of negative 3%. So I conclude, let me just state that we remain very optimistic about our business.

Given the strength of our balance sheet, the quality of our communities, and the tremendous land position that we have, we are well positioned as we begin the third quarter of 2025. And with that, I'll turn it over to Phil.

Phil Creek: Thanks, Bob. Our new contracts were down 8% for the quarter when compared to last year. They were down 12% in April, down 12% in May, and up 1% in June, and our cancellation rate for the quarter was 13%. 51% of our second quarter sales were to first-time buyers, and 73% were inventory homes. Our community count was 234 at the end of the second quarter, compared to 211 a year ago. And the breakdown by region is 99 in the northern region and 135 in the southern region. During the quarter, we opened 23 new communities while closing 15. We currently estimate that our average 2025 community count will be about 5% higher than last year.

We delivered 2,348 homes in the second quarter, delivering 82% of our backlog. And 36% of our second quarter deliveries came from inventory homes that were sold and delivered in the quarter. As of June 30, we had 5,100 homes in the field, versus 5,000 homes in the field a year ago. Our revenue increased 5% in the second quarter. Our average closing price for the second quarter was $479,000, a 1% decrease when compared to last year's average closing price of $482,000. Our second quarter gross margin was 24.7%, down 320 basis points year over year and down 120 points from our first quarter of 2025.

Our cycle time slightly improved in the second quarter compared to last year and our second quarter SG&A expenses were 11.3% of revenue compared to 11% a year ago. Our second quarter expenses increased 7% versus a year ago. And these increased costs were primarily due to our increased community count, and additional headcount. Interest income, net of interest expense for the quarter was $4.4 million. Our interest incurred was $8.7 million. We are pleased with our returns for the second quarter given the challenges facing our industry. Our pretax income was 14%, and our return on equity was 17%. During the quarter, we generated $169 million of EBITDA compared to $200 million in last year's second quarter.

And our effective tax rate was 24.3% in the second quarter compared to 24.4% a year ago. Our earnings per diluted share for the quarter decreased to $4.42 per share from $5.12 per share last year, down 14%. And our book value per share is now $117, a $17 per share increase from a year ago. Now Derek Klutch will address our mortgage company results.

Derek Klutch: Thanks, Phil. Our mortgage and title operations achieved pretax income of $14.5 million. A slight increase from $14.4 million in 2024's second quarter. Revenue increased 2% from last year to a second quarter record $31.5 million due to higher margins on loans sold, a higher average loan amount, and an increase in loans originated. Average loan to value on our first mortgages for the second quarter was 83%, compared to 81% in last year's second quarter. We continue to see an increase in the use of government financing. As 51% of the loans closed in the quarter were conventional, and 49% FHA or VA. Compared to 69% and 31%, respectively, for 2024's second quarter.

Our average mortgage amount increased to $403,000 in 2025's second quarter compared to $395,000 last year. Loans originated increased to 1,865 which was up 15% from last year. While the volume of loans sold increased by 10%. Finally, our mortgage operation captured 92% of our business in the second quarter. Up from 87% last year. Now I'll turn the call back over to Phil.

Phil Creek: Thanks, Derek. As to the balance sheet, we ended the second quarter with a cash balance of $800 million and no borrowings under our unsecured revolving credit facility. We continue to have one of the lowest debt levels of the public homebuilder and are well positioned with our maturities. Our bank line matures in late 2026, and our public debt matures in 2030 and has interest rates below 5%. Our unsold land investment at June 30, 2025, is $1.7 billion compared to $1.15 billion a year ago. And at June 30, we had $894 million of raw land and land under development and $803 million of finished unsold lots.

During 2025's second quarter, we spent $102 million on land purchases and $139 million on land development. For a total of $241 million. As of June 30, we own 24,500 lots and controlled 50,500 lots. And at the end of the quarter, we had 586 completed inventory homes, and 2,726 total inventory homes. And of the total inventory, 1,011 are in the Northern Region and 1,715 are in the Southern Region. As of June 30, 2024, we had 372 completed inventory homes, and 2,150 total inventory homes. We spent $50 million in the second quarter repurchasing our stock, and have $150 million remaining under our current board authorization.

Since the start of 2022, we have repurchased 14% of our outstanding shares. This completes our presentation. We'll now open the call for any questions or comments.

Operator: Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you wish to withdraw from the polling process, please press the star followed by the two. And if you are using a speakerphone, please lift the handset before pressing any keys. First question comes from Alan Ratner at Zelman and Associates. Please go ahead.

Alan Ratner: Hey, Bob. Hey, Phil. Good morning. Nice job in a tough environment. Congratulations.

Bob Schottenstein: Thanks, Alan. Good to hear from you. Thank you.

Alan Ratner: Nice to hear from you guys as well. Bob, I guess first question, kind of more bigger picture. I was hoping you could just provide a little bit more commentary across your footprint and kind of differentiation and trends you're seeing by price point, by geography, ones are the relative winners and losers in the current market.

Bob Schottenstein: Yeah, I'll try to do that. I think that there's just a lot of volatility week to week. Within inside the months. I think I saw another builder make a comment that, you know, one week is good and the next week is actually not so good. And it almost looks like a heart rate monitor. And that's what we've experienced. Having said that, I think in balance, our Midwest markets have outperformed the Carolinas, slightly. Although, I think the Carolinas are still quite good. We're sort of still just getting started in Nashville. So I'm not gonna make any comments about that because I don't feel that they're meaningful enough in terms of our performance.

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

When it was one of the strongest if not the strongest housing markets in the country. So Dallas has softened a bit. It's by no means horrible, but it's not nearly what it once was. Houston is a little softer too, maybe not quite as soft as Dallas. And I think Austin is crawling its way back. San Antonio is sort of somewhere in the middle there. You know, with very, very, sensitive to interest rates in terms of the buyer profile there. So in balance, you know, I'd say across all 17 of our markets, I'm glad we're in every single one of them.

You know, Columbus, Indianapolis, Chicago, Minneapolis, you know, I think are performing at a pretty good level right now. So is Charlotte, Raleigh. We're in a bit of a transition with communities coming on. Very bullish about all these places. Glad that if we weren't in these markets, we would go to them. And I think you know, Florida is in a bit of a reset on particularly the West Coast from our point of view. But I'm really bullish about Florida. I'm not ready to move there personally. But I'm very bullish because I think a whole lot of people are. And I think I don't think Florida's going anywhere.

I know the weather and hurricanes and those sort of things cause issues from time to time, but and I remain very bullish about Texas too. I think there you know, some of the margins that we were posting and I suspect others were as well, in Dallas and Houston. Not sure how sustainable they were long term, but they're still excellent housing markets. What 15% of the new homes sold in The United States, I think, are sold in the state of Texas. I suspect that'll continue. So we love where we are. We think we've got a lot of opportunity. I'm glad that we're not just one place or the other.

We still have no interest in going any further west than we are. You didn't ask that, but I'll offer that up. Because we think we can grow a whole lot within the markets that we're in. And we have a leadership position in over half of our markets. By that, I mean, we're either the first, second, third, or fourth largest builder. So lots of good things. Clearly, a challenging market as you know. You know it as well as anyone. But it's not horrible. I think conditions are about a C to C plus, and they've been that way really for quite some time.

But those of us that have been around in M/I Homes will be celebrating its fiftieth year next year, we know what D's and F's look like and we're by no means close to that. So, I mean, the fact that we can post 14% income in this environment I think is extraordinary. I think any double-digit pretax I remember when Ivy years ago, thought any builder that can get double-digit pretax income was hitting on all cylinders. The fact that we can do it right now in 2025 I think is, we're very proud of that. We've improved our cycle time. Our customer service and home readiness scores are the highest in company history, and they were always high.

We hold ourselves to a very high standard when it comes to that. And those are all third-party tabulated scores. So as we look at the business, you know, and think about where we are. We love our land position. I saw a report that you put out that thought we had too many tertiary communities. I'm not sure I know which ones you're talking about. I'm winking a little as I'm saying that to you. I think our land position is exceptionally well located. Really excited about that. And we have a lot of communities notwithstanding the current conditions that are performing at a very high level.

Alan Ratner: Well, I appreciate that big rundown and I think the tertiary communities is more a function of the markets you're in as opposed to the submarkets within those markets. I would agree with you on the land position. Quality, for sure. I guess you kind of brought up some of the normalization in margins in Texas and just kind of curious, I know you don't guide on margin, but still generating a pretty healthy overall margin, but it is down a couple 100 basis points year on year. I'm just curious as you think about the normalization on margin, what are the headwinds and tailwinds that you're facing today as you look at over the next year or so?

Bob Schottenstein: I didn't pick up the first the last part of that question. What are the what that we're facing? The headwinds to margin. So, like, going forward, what could pressure margin lower? And then what, if anything, could be a tailwind to improve margins? Yeah. And, you know, what a great question. I don't know that anybody really knows the answer to that. I think margins are starting to level off for us. They may get a little bit lower, I don't see another 100, 200, 300 basis point drop. Could happen, I think higher rates are gonna be here for a little while, so we're gonna continue to cut into margins by buying down, you know, mortgages.

But I think that you know, we were in the upper twenties. Now we're in the mid-twenties. I don't think we're gonna see them get a whole lot lower. They may get down to you know, 24, 23 or something like that, but by the same token, they may level off where they are now. I sort of feel like we've sort of found a space a place I don't see rates getting higher over the next number of quarters anytime soon. In fact, I think at some point, we'll likely to see them start to drop. That'll help margins. A lot. But you know, there's some concern about the impact of tariffs.

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

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

Bob Schottenstein: There was a noticeable uptick in traffic in June. And it but it didn't last the whole month. But there was. And you know, there was that period where we all sort of thought rates are starting to drop. And it was interesting how that seemed to impact traffic and buyer sentiment for a few hours. I think I saw where someone else commented on that in the last day or so. I can't remember. But, we saw that. And, you know, we don't really comment on current conditions, but you know, I think things are settling in a little bit here. And I think it's gonna continue to be a fight one buyer at a time.

But, that's what we've been doing all year. Hell, we've been doing that since last year at this time almost. And, you know, I think that sometimes comps can be impacted when you open a brand new series of communities all in one month and all of a sudden it shoots that month up. But period to period, I think our sales I think our sales have held up well and I believe they'll continue to. Relative to, you know, market conditions.

Alan Ratner: Appreciate all the color, guys. Good luck and talk soon.

Bob Schottenstein: Talk to you soon. Football season's on us, Alan. Get start getting excited.

Operator: Thank you. The next question comes from Ken Zener at Seaport Research Partners. Please go ahead.

Ken Zener: Good morning, Bob. It's Phil. Everybody.

Bob Schottenstein: Good morning.

Ken Zener: The margin stability you're talking about, the interest rates, I don't think I'd be disagreeing with you. But if you could operationally comment on the South, which for you guys includes Texas, Florida, a little more Texas than Florida, I think you said before. But the segment margins were gross margins were 24 in one Q, can you kinda and those have fallen sequentially. From four Q, but can you kind of talk about the spread there between the Florida and Texas margins? Give us a little better sense of the business composition?

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

Ken Zener: And one of the things that I've been focusing on which surprises me, do you have a census data saying there's all this new home inventory for sale? You can exclude homes for sale must started. But, like, to make it comparable to public, are you seeing in your markets the new home inventory you know, as high as the census is suggesting, which is you know, 30 plus percent above long-term averages? Or is it not necessarily the case where you see such nominally high inventory units? It's just more demand. That's affecting you guys.

Bob Schottenstein: I'll take a crack at that. I'm not sure that I'm looking at the same number that you are. But, as it relates to the large public builders, all of us are producing a lot more spec homes which go into that inventory number than we were two years ago. And maybe even we were a year ago. So that's certainly in there. But because of the rate environment we're in, the decision to do more spec homes, at least for us, has been critically important to our performance. Because the rate buy downs, which are so important, in order to get people to buy a home and to get to the closing table.

It's very difficult to produce if not ridiculously expensive. A very long-term rate lock. So the most attractive rate buy downs, the ones that most buyers are taking, are available on homes that can close within sixty days. So if we don't have the inventory, we don't have that to offer. On the other hand, the listings which are up in almost every market that we're in, in some cases considerably, that includes existing homes too, and the one tremendous advantage financially that we have and the other builders new home builders have over existing homes, is our ability to offer rate buy downs, which the average seller of an existing home is somewhat powerless to do.

They could do it, but it's not as it's just not as don't have the agility or the internal operation to be able to generate that as quickly as we do. So I don't know if that really answers your question.

Ken Zener: No. It does. I guess, yes, different builders is, but do you guys respond to the census data request because I know many of the other public builders actually don't respond. To those. Do you guys I don't I don't the census?

Bob Schottenstein: I don't know that we do. If we do, I'm not aware of it. I'll have to check that. I actually don't pay that much attention to a lot of that data. Because it's so dated. I'm not sure how reliable it is.

Ken Zener: Thank you very much.

Bob Schottenstein: Thanks a lot for your question.

Operator: Thank you. The next question comes from Buck Horne at Raymond James. Please go ahead.

Buck Horne: Hey, thanks. Good morning. Congrats on a great quarter in a difficult environment. I wanted to just go back to the kind of the monthly progression of the order trends you guys highlighting. Others have kind of commented that incentives increased as the quarter progressed or there was a need to kind of accelerate some incentives, which is kind of going to lead to a little bit of further margin erosion into the third quarter. I'm just kind of wondering, as you guys saw an uptick in your orders in June, was that due to a more heavy decision on incentives? Or was that more of an organically driven demand lift?

Bob Schottenstein: I think the latter. Look. For all intents of we're not really doing much with incentives. If at all, other than rate buy downs. That's our primary incentive. And there have been periods week to week you know, or every several weeks where the cost to buy the rate down to what we think we where we think we need to be on both the government and conventional side, where it costs a little more, it costs a little less. You know, that may be a 100 basis points or 50 plus or minus from time to time. But we didn't you know, some builders are maybe more aggressive with their incentives. Other than rate buy downs.

I think most haven't been. Which has been good to see at least from my point of view. You know, there's always someone that may be doing something that maybe we don't think it makes that much sense because you can only sell the house one time. And, you know, lots are precious commodities if they're well located. But I don't know if you have anything to add. It's very hard to project what margins are. One of the things I mentioned was that in the second quarter, we had about 36% of our closings that were spec sales that were sold and closed in the quarter. We also have opened in the first half 50 new stores.

So that impacts, you know, what we're doing. Only get a chance to open one time the right way and gotta be very careful as far as pricing and incentives, especially with new communities. You know, in general, our more expensive houses higher priced, you know, tend to hold up a little better these days as far as price and margin. Specs, there's an art to selling specs. You know, today, we're selling about 70% specs. And, although in general, specs are lower margins than to be built, again, there is an art to, you know, what house you're specking on which lot, and how do you manage the incentive on specs.

As Bob said, a big part of that is you know, there's a lot more efficiency in buying down rates in a shorter period of time. So it's just very hard to predict what margins are. But, you know, overall, we feel really pretty good about, you know, where we are.

Buck Horne: Sounds good. I appreciate the color. And I guess, you know, thinking about the specs and kind of your projected community count growth in the back half on top of the new openings you've already achieved here. So I'm just wondering how you're thinking about the start pace through year-end. Do you need to do you need to accelerate more specs to hit your delivery goals, or do you have enough product in process right now?

Phil Creek: You know, we're trying to manage a lot of things. I did that at 5,100 homes in the field versus 5,000 a year ago. Our store count is up about 10%. So, you know, we do have more stores. We do have more people. We do have higher SG&A. So, obviously, we need a certain amount of volume. But having said that, we're not trying to force it. You know, land is a very hoarded commodity to us. It takes a long time to get a location.

And get those zoned approved get the specs and the models built, so, again, we're trying to drive a certain amount of volume but we're not trying to force volume like certain other builders are.

Buck Horne: That's perfect. Thanks for the color, guys, and, Bob, I really appreciate the bullishness on Florida in particular. And so it's good to hear that Tampa's finally things to have turned the corner as well.

Bob Schottenstein: Yeah. I mean, I look. I don't know that I'd say it's completely turned the corner, but, you know, I think the steering wheel's heading in the right direction.

Buck Horne: Good news. Appreciate the color.

Bob Schottenstein: Thanks, Buck.

Operator: Thank you. The next question comes from Jay McCanless at Wedbush. Go ahead.

Jay McCanless: Hey, good morning, everyone.

Bob Schottenstein: Hey, Jay.

Jay McCanless: So, Bob, I think good to talk to you. So I think, Bob, you talked about it in one of in answering Alan's question, but at roughly 25 to 30% lumber coming from Canada, have you all tried to plan out or map out what type of gross margin impact that might have if they do knock that tariff rate up to 34%?

Bob Schottenstein: Yeah. I think I said 20 to 30%, but Phil, I don't I think it's too early to know right now because I don't think we have any division that gets the entire lumber. It's pieces and parts of certain kind of wood that come out of Canada. And also certain pieces and parts can be substituted in different ways. So we have not seen anything yet that makes us think there's gonna be a significant increase. You know, overall, our construction costs the last couple of quarters have pretty much been flat. And, also, even though land costs in general have continued to go up, land development cost has really kinda leveled off some.

So from what we're seeing, we're not anticipating any type of significant increase, you know, the second half of this year. And if anything does start changing like that, we think there's a couple levers we can pull.

Jay McCanless: That's good to know. Because I just kind of the second part of that question is what you talked about, Bob, was margins trying to level out and we've been worried that if lumber prices move up, along with what sounds like a more aggressive promotional environment, at least for the next few months that builder gross margin should could come under pressure. So just trying to get a sense of where that's going. The second question I had is if you look at the North and Pulte called it out yesterday, you guys called out the Northern Market's Doing Better.

Is There Any Thought To Maybe Starting To Expand Again Up North, Whether Through M And A Or Through Adding Some Communities? How Are You Guys Thinking About That, Especially With Some Of The Affordability Really Good Affordability In Some Of Those Northern markets?

Bob Schottenstein: Well, we're glad that we're in really three distinct geographies. Maybe four. To count Carolinas and Nashville is sort of somewhere mid. But Midwest, Florida, Texas, I'm like, very bullish about all. Right now, I think the Midwest is holding up a little better candidly. We've got very big operation in Columbus. And in Chicago. And in Minneapolis. And a rapidly growing been there a long time, but a rapidly growing operation as well in Indianapolis. Detroit our Cincinnati operation is probably as strong as it's ever been, and we've been there since 1990. We have a lot invested in our Midwest markets.

And we're prepared to invest more every single one of those markets has a plan to grow over the next one, two, three, four years. And we don't think it's irrational. We think it's doable. At varying degrees. Every one of the cities has projected household formation growth. And right now, I think no different than the rest of the country. A shortage of homes and a lot of buyers on the sidelines. So I want to overstate our perceived bullishness. We just think it's a really good area and we're gonna you know, we do a lot of volume in the aggregate in the Midwest. And we expect that volume to grow.

Phil Creek: If you look at it in, Jay, overall, you know, in the 17 markets we're in, we do not have a single division today doing a thousand units. And we think that we can do that in a few of our divisions. As we look out the next couple years, again, assuming that things do get a little bit better, which we think they will, worst case. Next year. We think we can do 12, 13, 14,000 houses in our 17 markets. But, we want profitable growth, we like to control our most risky asset, land, you know, we'd like to stay within that two to three-year range of what we own. And today, we own about 25,000 lots.

If we continue to conservatively cautious grow the business, we think we have the leadership teams. And we think we're pretty good at land and product and those type of things. So you know, we are getting to the point where we're starting to get to scale we need in Fort Myers and Nashville. Which we just opened a couple years ago. But, again, there's a number, you know, of builders doing 2,000, 3,000 units even in some markets. Again, we're not doing a thousand in any market yet. So we think we're really positioned to grow a lot, but we want to grow smart, grow profitably. And also, you know, provide good returns.

Jay McCanless: Great. Thank you. And then on SG&A, I know you guys said that SG&A dollars were up because of headcount increases. And community count. I guess, are you getting close to maybe what the run rate is gonna be at this higher level of operations, or do you think there might be some more increases in SG&A dollars going forward on a quarterly basis?

Phil Creek: I think there'll be some continued increase, Jay. Mean, we opened 50 new stores the first half. You know, last year, all year, we opened 72. We expect in the second half to open a similar number as the first half. We talked about having, you know, community count growth on average up, like, 5%. So we're probably gonna continue to have higher headcount. You know, there are certain costs associated, you know, with more stores. So, realistically, you know, we do think SG&A dollars will probably continue to grow up. As far as volume, you know, again, we do have a few more houses in the field than we had a year ago.

Hopefully, you know, our closings will continue to be pretty strong but that is based on, you know, us having to continue selling a lot of specs. At reasonable profit levels that's kind of what we're focused on.

Jay McCanless: Okay. Got it. And then the last question I have, I don't know if you guys have looked at this, but a couple builders have actually disclosed where their average mortgage rate is in the backlog at this point. Could you talk about that and maybe what your gross margin backlogs or the gross margin and backlog looks like?

Phil Creek: I mean, the margin and the backlog, you know, today it's in a whole lot different than it was at the end of the first quarter. You know, maybe down 50 or 100 basis points, as Bob said. That there continues to be margin pressure. There could be some more downward margins. You know, I don't think anything significant. That just kinda depends. As far as the mortgage rates and those type of things, that's not something that we've disclosed in the past. I don't think incentives have changed a whole lot. You know, most builders these days with the thirty-year rate around seven, you know, most people are 150, 250 basis point below that.

Generate the traffic and the sales we want. So I don't think that's changed a whole lot.

Jay McCanless: Okay. Great. That's all I had. Thanks, guys.

Phil Creek: Thanks, Jay.

Operator: Thank you. We have no further questions. I'll turn the call back over to Phil Creek for closing comments.

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 we ask that you please disconnect your lines.

Where to invest $1,000 right now

When our analyst team has a stock tip, it can pay to listen. After all, Stock Advisor’s total average return is 1,034%* — a market-crushing outperformance compared to 180% for the S&P 500.

They just revealed what they believe are the 10 best stocks for investors to buy right now, available when you join Stock Advisor.

See the stocks »

*Stock Advisor returns as of July 21, 2025

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.