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Text: On the call 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.
We are extremely pleased with our fourth quarter and full year results, highlighted by significant growth and record-setting financial achievements across the board.
By every measure, 2020 was an outstanding year for M/I Homes.
We nearly doubled our net income, increasing our bottom line by 88% over 2019, resulting in a very strong return on equity of 22%.
A number of factors contributed to our strong returns.
We achieved record revenue of $3 billion, an increase of 22% over 2019.
Record closings of 7,709 homes, 22% better than a year ago.
Very strong gross margins that reached 23% in the fourth quarter and 22.2% for the full year, a 260 basis point improvement over 2019.
And our full year pre-tax income percentage improved 360 basis points to 10.2%.
These results continue the trend of strong growth in revenues and earnings that we've achieved, frankly, since coming out of the recession.
Specifically, since 2012, our revenues have grown at a compounded annual rate of 19%, and our pre-tax income has grown at an even more impressive compound annual rate of 49%.
In addition, the strong performance of our mortgage and title operations as well as improved SG&A operating leverage also contributed to our record earnings.
We also had an outstanding sales year.
New contracts for the year improved by 39% to a record 9,427 homes sold.
Fourth quarter sales continued the strong pace of sales that began in late April.
During the quarter, we sold 2,128 homes, a fourth quarter record and 27% better than a year ago.
Overall, housing demand remains very strong, driven by a number of factors, including historically low mortgage rates, low inventory levels, and increasing number of millennials joining the ranks of homeownership and a shift in buyer preference away from renting in more densely populated areas, in favor of single-family homes.
In addition, a number of other factors also helped drive our strong sales performance.
Among them are the quality of our locations, our ability to execute on many fronts, including successfully managing a rapidly increasing number of online leads and the continued success and growth of our Smart Series line of homes.
With respect to our Smart Series, let me remind you that this is our most affordably priced product offering.
At the end of 2020, our Smart Series was being offered in all 15 of our housing markets, comprised 62 of our total communities or 31% of total and accounted for more than 35% of total company sales.
Our Smart Series communities continue to provide a better monthly sales pace, better margins, faster cycle time and, as a result, better overall returns.
We fully expect the sale of our Smart Series homes to grow further within our markets and likely approach 40%-plus of total M/I sales in the coming year.
And in terms of demand and traffic as we begin 2021, housing conditions continue to be very robust throughout all 15 of our markets.
Our year-end backlog increased 64% in units to 4,389 homes, and the dollar value increased by 74% to an all-time company record of $1.8 billion.
Now I will provide some additional comments on our markets, which we divide into two regions.
The Northern region, which consists of Columbus, Cincinnati, Indianapolis, Chicago, Minneapolis and Detroit.
And the Southern region, which consists of the balance of our markets: Charlotte, Raleigh, Orlando, Tampa, Sarasota, Houston, Dallas, Austin and San Antonio.
We experienced strong performance in the fourth quarter across both the Northern and Southern regions, with new contracts in the Southern region increasing by 31% for the quarter and 21% in the Northern region.
Our closings or deliveries increased 16% over last year's fourth quarter in the Southern region and increased 19% over last year's fourth quarter in the Northern region.
Our owned and controlled lot position in the Southern region increased by 23% compared to a year ago and increased by 12% in the Northern region compared to last year.
While we are selling through communities somewhat faster than expected, it's important to underscore that we are very well positioned to open new communities in 2021 and well into 2022.
37% of our owned and controlled lots are in the Northern region with the balance, 63%, in the Southern region.
We have a very strong land position.
Companywide, we own and control approximately 40,000 lots, up 19% from last year, which equates to about a four to five year supply.
Perhaps more important, over half of the lots that we own and control or about 57% are controlled under option contracts and not yet on our books.
This gives us significant competitive flexibility to react to changes in demand or individual market conditions.
We had 112 communities in the Southern region at the end of the quarter, down from 129 a year ago.
And we had 90 communities in the Northern region at the end of the quarter, down from 96 a year ago.
As I mentioned, the decline in community count is partially a result of our accelerated sale pace.
But it's also important to recognize that nearly 1/3 of our communities are now offering our Smart Series homes.
And that these communities not only often have more lots in total, but as noted earlier, generally produce a greater sales pace.
Before turning the call over to Phil, let me just make a few concluding comments.
First, our financial condition is very strong with $1.3 billion of equity at December 31 and a book value of $44 per share.
We ended 2020 with a cash balance of $261 million and 0 borrowings under our $500 million unsecured revolving credit facility.
This resulted in a 34% debt-to-cap ratio, down from 38% a year ago and a net debt-to-cap ratio of 23%.
Second, 2020 was a year of unprecedented challenge and severe hardship caused by the global pandemic.
As an industry, we have been very fortunate that our business and the business of our competitors has held up exceptionally well.
As it relates to M/I Homes, I could not be more proud of our company as we came together to safely and carefully provide quality homes to so many.
Finally, as we move forward into 2021, we are very optimistic about our business.
Our backlog is strong.
Our sales pace has been terrific.
We have an excellent land position, and housing conditions, including both demand and traffic continue to be very good.
We have a lot of operating momentum and are positioned for another strong year in 2021.
As far as financial results, new contracts for 2020 increased 39% to 9,427, an all-time record compared to 6,773 for last year.
Our new contracts were up 14% in October, up 36% in November and up 35% in December for a 27% improvement in the quarter compared to last year's fourth quarter.
Our sales pace was 3.5 in the fourth quarter compared to 2.5 in last year's fourth quarter.
And our cancellation rate for this year's fourth quarter was 10%.
We are also pleased to say that our buyer demand continued to be very strong in January.
As to our buyer profile, about 53% of our fourth quarter sales were to first-time buyers compared to 49% a year ago.
In addition, 43% of our fourth quarter sales were inventory homes compared to 44% in last year's fourth quarter.
Our community count was 202 at the end of the year compared to 225 at the end of 2019, and the breakdown by region is 90 in the Northern region and 112 in the Southern region.
During the quarter, we opened 18 new communities while closing 23.
And for the year, we opened 69 new communities and closed 92.
We delivered a record 2,242 homes in the fourth quarter, delivering 50% of our backlog compared to 66% a year ago.
There are a couple of factors that led to this decline in backlog conversion rates when compared to last year.
First, our extremely strong sales and significantly higher backlog levels in the back half of 2020 led to longer times for getting homes started.
Secondly, we have been selling spec homes nearly as fast as we can get them started, which leads to lower spec home inventories, especially those which are closer to completion and could contribute to closings within 90 days.
Revenue increased 22% in the fourth quarter of this year, reaching a fourth quarter record $906 million.
And our average closing price for the fourth quarter was $389,000, a 3% increase when compared to last year's fourth quarter average closing price of $377,000.
Our backlog average sale price is $419,000, up 6% from a year ago, and our backlog average sale price of our Smart Series is $322,000.
We recorded $8.4 million of impairment charges in the fourth quarter compared to $5 million in last year's fourth quarter.
And our operating gross margins, excluding impairments for the fourth quarter, was $24.1 million, up 420 basis points year-over-year and up 120 basis points from 2020's third quarter.
Our higher margins in our Texas operations were a big driver of our margin improvement.
And for the full year of 2020, our operating gross margin was 22.5% versus last year's 19.8%.
Our construction costs increased by about 3% in the fourth quarter, with the biggest impact from lumber.
And our fourth quarter and full year SG&A expenses were 11.7% of revenue, a 40 basis points improvement compared to 2019.
And 2020 is our third consecutive year of improved SG&A efficiency.
Interest expense decreased $3.5 million for the quarter compared to the same period last year and decreased $11.7 million for the 12 months of this year.
The decrease for the year is due to lower outstanding borrowings as well as a lower weighted average borrowing rate.
And interest incurred for the quarter was $10 million compared to $12.5 million a year ago.
And for the year, interest incurred was $40 million versus $49 million a year ago.
We are pleased with our improved returns for the year.
Our pre-tax income was 10.2% versus 6.6% last year, and our return on equity was 22% versus 14% a year ago.
During the fourth quarter, we generated $127 million of EBITDA compared to $75 million in last year's fourth quarter.
And for the full year 2020, we generated $383 million of EBITDA, up 60% over last year.
Despite a significant amount of reinvestment into our business, we generated $168 million of positive cash flow from operations in 2020 compared to $66 million last year.
We have $21 million in capitalized interest on our balance sheet.
This is about 1% of our total assets.
And our effective tax rate was 21% in this year's fourth quarter compared to 19% in last year's fourth quarter.
Our annual effective rate this year was 22.6% compared to 23.2% for 2019.
Our fourth quarter and annual tax rate benefited from energy tax credits from prior years.
And we expect 2021's effective tax rate to be around 24%.
Our earnings per diluted share for the quarter increased 88% to $2.71 per share from $1.44 per share in last year's fourth quarter and increased 83% for the year to $8.23 from $4.48 per share last year.
Now Derek Klutch will address our mortgage company results.
Our mortgage and title operations achieved record fourth quarter results in 2020, including record pre-tax income of $14.8 million, up $8.4 million or 131% over 2019.
And record revenue of $25.6 million, which was up 62% over last year due to a higher volume of loans closed and sold along with significantly higher pricing margins.
We also set a record for the number of loans originated.
For the year, pre-tax income was $50.5 million and revenue was $87 million, both all-time records.
The loan-to-value on our first mortgages for the fourth quarter was 83% in 2020, up from 2019's fourth quarter of 82%.
74% of the loans closed in the fourth quarter were conventional and 26% were FHA/VA compared to 76% and 24%, respectively, for 2019's same period.
Our average mortgage amount increased to $319,000 in 2020's fourth quarter compared to $303,000 in 2019.
The number of loans originated increased 25% from 1,398 to an all-time quarterly record of 1,746, and the volume of loans sold increased by 15%.
Our borrower profile remains solid with an average down payment of over 15%.
For the quarter, the average borrower credit score on mortgages originated was 745, a slight decline from 747 last quarter.
Our mortgage operation captured over 85% of our business in the fourth quarter, an increase from 84% one year ago.
We maintain two separate mortgage warehouse facilities that provide us with funding for our mortgage originations prior to sale to investors.
At December 31, we had a total of $226 million outstanding under these facilities, which expire in May and October this year.
Due to our typical high-volume of fourth quarter closings, we include a seasonal increase in our warehouse facilities, which provides temporary availability of $275 million through February 4, 2021.
After which time, total availability returns to $215 million.
Both facilities are typical 364-day mortgage warehouse lines that we extend annually.
As far as the balance sheet, total homebuilding inventory at 12/31/20 was $1.9 billion, an increase of $147 million over December '19 levels.
During 2020, we spent $415 million on land purchases and $318 million on land development for total land spending of $733 million, which was up from $600 million in 2019.
In 2020, we purchased about 11,500 lots, of which 77% were raw with about 150 average lots per community.
In 2019, we purchased about 7,500 lots, of which 63% were raw with about 100 average lots per community.
In general, most of our Smart Series communities are raw land deals and have above-average company pace and margin.
We have a strong land position at 12/31/20, controlling almost 40,000 lots, up 19% from a year ago.
And of the lots controlled, 43% are owned.
Based on 2020's record closings, this is about a five year supply of inventory with just over two years owned.
And at the end of the year, we had 225 completed inventory homes, about one per community and 1,131 total inventory homes.
At 12/31/19, we had 668 completed inventory homes and 1,459 total inventory homes.
We'll now open the call for any questions or comments.

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q4 earnings per share $2.71.
homes delivered increased 17% to 2,242 in quarter.
backlog units increased 64% to 4,389 in quarter.

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