M/I Homes - Earnings Call - Q3 2025

Executive Summary

• Revenue and EPS declined year over year and sequentially as gross margins compressed on higher sales incentives and an inventory charge; Q3 revenue was $1.132B and diluted EPS was $3.92 vs $1.143B and $5.10 in Q3’24, and vs $1.163B and $4.42 in Q2’25. The quarter included $7.6M of inventory charges (≈60 bps of GM impact) and gross margin of 23.9% (down ~320 bps YoY).
• Orders softened (1,908, -6% YoY) with a 12% cancellation rate, while closings hit a Q3 record (2,296, +1% YoY); average closing price fell 2% YoY to $477K.
• Consensus misses: revenue $1.132B vs $1.156B consensus* and EPS $3.92 vs $4.37 consensus* (2 estimates); margin headwinds from rate buy-downs and higher land costs were the primary drivers.*
• Balance sheet strength and liquidity de-risk the outlook: Moody’s upgraded to Ba1, bank credit facility extended to 2030 and upsized to $900M (no borrowings), cash $734M, homebuilding debt-to-capital 18%, net debt-to-capital ~-1%.

What Went Well and What Went Wrong

• What Went Well

  • Record Q3 deliveries (2,296, +1% YoY) and strong financial services performance (pre-tax $16.6M, +28% YoY; revenue $34.6M, +16% YoY) supported results despite demand volatility.
  • Liquidity and capital structure improved: credit facility extended to 2030/upsized to $900M (no borrowings), cash $734M; Moody’s upgrade to Ba1.
  • Operational execution: cycle time improved ~10 days YoY and vs Q1; mortgage capture hit a record 93%; Smart Series mix ~52% aided affordability.

• What Went Wrong

  • Margins compressed: Q3 GM 23.9% (down ~320 bps YoY), pre-tax margin 12% (down from 14% in Q2 and 15% in Q1); inventory charges of $7.6M reduced GM ~60 bps; underlying pressure from mortgage rate buy-downs and higher land costs.
  • Orders softness: new contracts 1,908 (-6% YoY), monthly pace 2.7 per community vs 3.2 last year; cancellations increased to 12% (from 10%).
  • Backlog down sharply: 2,189 units (-31% YoY), $1.211B (-30% YoY); spec share elevated (75% of Q3 sales) and generally lower-margin than to-be-built.

Transcript

Speaker 0

Good morning, ladies and gentlemen, and welcome to the M/I Homes third quarter earnings conference call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on October 22, 2025. I would now like to turn the conference over to Phil Creek. Please go ahead.

Speaker 6

Thank you for joining us today. On the call with me is Bob Schottenstein, our CEO and President, and Derek Klutch, President of our mortgage company. 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. 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 the call over to Bob.

Speaker 1

Thanks, Phil. Good morning, and I too want to thank you all for joining us today. Despite the continued challenging market conditions and choppy, uneven demand environment, we had a very solid third quarter. We generated $140 million of pre-tax income. Though down 26% from last year's record third quarter results, our pre-tax income percentage was a very solid 12% of revenue, with gross margins of 24% and resulted in a strong return on equity of 16%. Consistent with our first and second quarter commentary, and also consistent with what our industry peers have reported, housing demand and overall market conditions remain somewhat challenging. In our view, housing conditions are just okay. Certainly not great, but still just okay. Probably about a C+. We continue to incentivize sales and drive traffic, primarily with mortgage rate buy-downs.

The cost of such buy-downs are the primary reason for the decline in our gross margins. We will continue to use such rate buy-downs where necessary, on a subdivision-by-subdivision basis, in order to drive traffic and generate sales. In terms of our third quarter performance, we closed a third-quarter record 2,296 homes, a 1% increase compared to a year ago. Our third-quarter total revenue decreased 1% to $1.1 billion. We sold 1,908 homes during the quarter, down 6% compared to 2023's third quarter of 2,023 homes sold. Our monthly sales pace averaged 2.7 homes per community compared to a monthly pace of 3.2 homes in 2023. Year to date, we have sold 6,278 homes, down 8% from a year ago. Encouragingly, we continue to see quality buyers in terms of creditworthiness, with a strong average credit score of 745 and average down payments of around 16%.

Our Smart Series, which is, as we've stated previously, our most affordable line of homes, continues to be an important contributor to sales performance. During the third quarter, Smart Series sales comprised about 52% of total sales compared to just about 50% a year ago. We continue to make important progress in our cycle time. Our third-quarter cycle time was about 10 days better than last year, as well as about 10 days better than this year's first quarter. We ended the quarter with 233 communities and remain on track to grow our community count, the balance of 2024, by about 5% from 2023. As Derek Klutch will review in a few minutes, our mortgage and title operations had a very strong quarter, highlighted by capturing a record 93% of our business in the quarter. Now I will provide some additional comments on our markets.

Our division income contributions in the third quarter were led by Columbus, Chicago, Dallas, Minneapolis, Orlando, and Cincinnati. New contracts for the third quarter in the northern region decreased by 17%, and new contracts in our southern region increased by 3% compared to last year's third quarter. Our deliveries in the southern region increased by 8%, and our deliveries in the northern region decreased by 7% from a year ago. 59% of deliveries came out of the southern region, 41% out of the northern region. We feel very good about all 17 of our markets. That said, we are expecting particularly strong full-year results in Columbus, Chicago, Dallas, Minneapolis, Cincinnati, Orlando, and Charlotte. We have a strong land position. Our owned and controlled lot position in the southern region decreased by 6% compared to last year and increased by 3% versus last year in the northern region.

36% of our owned and controlled lots are in the north, the other 64% in the southern region. Company-wide, we own approximately 24,400 lots, which is slightly less than a three-year supply. In addition, we control approximately 26,300 lots via option contracts, resulting in a total of 50,700 owned and controlled lots, equating to about a five to six-year supply. With respect to our balance sheet, we once again ended the quarter in excellent shape. During the quarter, we extended our bank credit facility by five years to 2030 and increased the borrowing capacity under that line from $650 million to $900 million. We ended the third quarter with an all-time record $3.1 billion of equity, equating to a book value per share of $120, up 15% from a year ago.

We had zero borrowings under the $900 million unsecured line and over $700 million in cash, all resulting in a very strong debt-to-capital ratio of 18%, down from 20% last year, and a net debt-to-capital ratio of negative 1%. As I conclude, let me just say we remain quite optimistic about our business and continue to believe that our industry will benefit from the undersupply of homes and growing household formations throughout our markets. Our backlog remains healthy, and with our strong balance sheet and strong liquidity, we have tremendous flexibility as conditions evolve. We are well positioned as we begin the fourth quarter of 2025. With that, I'll turn it over to Phil.

Speaker 6

Thanks, Bob. Our new contracts were down 6% when compared to last year. They were flat in July, up 4% in August, and down 18% in September. Our cancellation rate for the third quarter was 12%. Last September sales were strong. It was our second highest September in our history. During the third quarter, our sales were really pretty consistent. We sold 618 in July, 660 in August, and 630 in September. 50% of our third-quarter sales were to first-time buyers, and 75% were inventory homes. Our community count was 233 at the end of the third quarter compared to 217 a year ago, up 7%, with the northern region up 9% and the southern region up 6%. The breakdown by region is 96 in the northern region and 137 in the southern region. During the quarter, we opened 14 new communities while closing 15.

We currently estimate that our average 2025 community count will be about 5% higher than last year. We delivered a record 2,296 homes in our third quarter, delivering 89% of our backlog. About 35% of our third-quarter deliveries came from inventory homes that were sold and delivered in the quarter. At September 30, we had 5,000 homes in the field versus 5,100 homes in the field a year ago. Revenue decreased 1% in the third quarter, and our average closing price in the third quarter was $477,000, a 2% decrease when compared to last year's third quarter average closing price of $489,000. Our third-quarter gross margin was 23.9%, down 320 basis points year over year, with 60 basis points of the decline due to $7.6 million of inventory charges.

The breakdown of the inventory charges is $6 million of impairments and $1.6 million of lot deposit due diligence costs that were written off. Our construction costs were down about 1% in the third quarter compared to the second quarter. Our third-quarter SG&A expenses were 11.9% of revenue compared to 11.2% a year ago. Our third-quarter expenses increased 6% versus a year ago. Our increased costs were primarily due to higher community count and higher selling expenses. Interest income, net of interest expense for the quarter, was $4.5 million. Our interest incurred was $8.7 million. We had solid returns for the third quarter given the challenges facing our industry. Our pre-tax income was 12%, and our return on equity was 16%. During the quarter, we generated $157 million of EBITDA compared to $198 million in last year's third quarter.

Our effective tax rate was 23.8% in the third quarter compared to 22.9% in last year's third quarter. Our earnings per diluted share for the quarter decreased to $3.92 per share from $5.10 last year. Our book value per share is now $120, a $16 per share increase from a year ago. Now, Derek Klutch will address our mortgage company results.

Speaker 5

Thanks, Phil. Our mortgage and title operations achieved pre-tax income of $16.6 million, an increase of 28% from $12.9 million in 2024's third quarter. Revenue increased 16% from last year to a third-quarter record $34.6 million due to higher margins on loans sold, a higher average loan amount, and an increase in loans originated. The average loan-to-value on our first mortgages for the third quarter was 84% compared to 82% in 2024's third quarter. We continue to see an increase in the use of government financing, as 55% of the loans closed in the quarter were conventional and 45% FHA or VA, compared to 66% and 34% respectively for 2024's third quarter. Our average mortgage amount increased to $406,000 compared to $403,000 last year. Loans originated increased to 1,848, which was up 9% from last year, while the volume of loans sold increased by 19%.

Finally, as Bob mentioned, our mortgage operation captured 93% of our business in the third quarter, and this was up from 89% last year. Now I'll turn the call back over to Phil.

Speaker 6

Thanks, Derek. Our financial position continues to be very strong, highlighted by Moody’s recent upgrade of our credit rating and the extension of our unsecured credit facility to September 2030, which increased our borrowing capacity from $650 million to $900 million. We ended the third quarter with no borrowings under this facility and had a cash balance of $734 million. We continue to have one of the lowest debt levels of the public home builders and are well positioned with our maturities. Our bank line matures in 2030, and our public debt matures in 2028 and 2030. Our unsold land investment at 9/30 is $1.8 billion compared to $1.6 billion a year ago. At September 30, we had $931 million of raw land and land under development and $859 million of finished unsold lots.

During the third quarter, we spent $115 million on land purchases and $181 million on land development for a total of $297 million. At the end of the quarter, we had 776 completed inventory homes and 3,001 total inventory homes. Of the total inventory, 1,245 were in the northern region and 1,756 were in the southern region. At September 30, 2024, we had 555 completed inventory homes and 2,375 total inventory homes. We spent $50 million in the third quarter repurchasing our stock and have $100 million remaining under our current board authorization. Since the start of 2022, we have repurchased 15% of our outstanding shares. This completes our presentation. We'll now open the call for any questions or comments.

Speaker 0

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the one on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Kenneth Zener with Seaport Research Partners. Your line is now open.

Good morning, everybody.

Speaker 6

Good morning.

If we could talk about orders a little bit, you had, as we measure, kind of normal seasonality, which is pretty impressive in the so-so market you reflect. Can you talk to that dynamic of you wanting to achieve, right, what we see as seasonality? I mean, you might look at it differently, and the use of incentives, and if you could quantify the incentives, level in general and the mix between price and mortgage rate buy-downs closing costs, please.

Yeah. Great question. Clearly a somewhat challenging market, unpredictable too. From week to week, a fair amount of intra-market volatility within our divisions. One month, certain of our divisions might have stronger sales, and then unexpectedly, things slow down, then they pick back up. As I said, I think things are just okay. That said, it's critically important for us to drive traffic and do everything we can to incent sales in this market. I don't think we're alone in this, but we have concluded that there is no better way to do that than through the selective use of mortgage rate buy-downs. We have not offered any specifics on the exact amount that we're spending. It tends to change over time based upon what's happening in the market.

You can go on our website and you can see that both with respect to conventional as well as FHA, we're offering rates in the very high fours. We have found that to be a pretty good sweet spot to do what we are currently doing. Absent the inventory charges that Phil mentioned that accounted for about 60 to 70 basis points of our gross margin decline, our margins are down about 250 basis points year over year. I would just simply say that the majority of that is due to mortgage rate buy-downs. There is some subdivision-by-subdivision incentivization that might be going on here and there, but the significant majority of it is rate buy-downs. Frankly, some of the other decline is just increased cost on the land side. We've had a lot of success. I don't think we're alone on this, which is also encouraging.

You don't want to be the only one doing something because it may not be sustainable. We've had a lot of success on our sticks and bricks, our raw materials and costs with our subcontractors and suppliers, relatively flat to down, which has been very encouraging, notwithstanding all the chatter about impact of tariffs. We have seen no impact of tariffs to date. I think the jury's out on how things shake out as we move into next year. Thus far, we haven't seen any of that flow through to our results. We're going to continue, as I said, Ken, to use rate buy-downs as the primary driver for both traffic and sales as long as it keeps working. If rates were to drop, there's been a little bit of movement recently. It didn't seem to have that much of an impact on demand.

That's a bit of a fit-and-start kind of a situation. If rates begin to drop, the cost of such mortgage rate buy-downs, you know, hopefully will drop as well. More importantly, if we do see a drop in rates, that could help unlock the existing home market, which, you know, we're getting these results really without much help from the sale of existing homes. That could be a big tailwind for housing if and when that begins to unlock because even though inventory levels of existing homes in our markets are not anywhere near the all-time highs, they are up considerably year over year and over the past two years and past three years. The long answer to your question, I hope it tells you, you know, most of what you asked.

Yes, appreciate it. My second question, because you report the South as a segment versus the North, the South obviously has Texas, Florida, which are different markets. Gross margins were about the same last quarter in those regions, even a little different. Could you comment on, prior to the Q coming out, the gross margin trends we're seeing in those two segments? If you have any comments you could to illuminate the aggregation of Texas and Florida, it would be appreciated. Thank you, sir.

I'll say a couple of things about it. For us, Orlando on the east relative to the East Coast is stronger than Tampa and Sarasota. Fort Myers, we have a relatively new operation. It's not really that meaningful in terms of results. Demand and margins for us are clearly holding up better in Orlando than they are in Tampa and Sarasota. I think Austin in Texas, that market was red-hot a couple of years ago, and over the last 12 to 18 months, it's cooled considerably. It's probably struggling the most in Texas. We have seen margins drop also in Houston and Dallas. Comparatively, I think they're still holding up quite well. We're expecting, as I said, a strong year in Dallas. Charlotte and Raleigh have both been pretty good. As I also mentioned, we're expecting a strong year in Charlotte.

It's a little, not to be snarky, but it's a bit of a tale of 17 cities. They're all a little bit different. We've long said that this business is a subdivision business. We got about 233 of them, and we try to manage them that way. Within the cities, what I've just described is probably a pretty good snapshot from 10,000 feet.

If you look also, this is Phil, if you look at community count, last year, our average community count was up about 7%. This year, our estimate is we'll be up about 5% on average. We feel good about that. If you look inside those numbers, as I said, both regions do have community count growth. Our Florida community count has actually been down a little bit this year. Our Texas community count's been up a little bit. As Bob said, in general, our Midwest and Carolina business, as far as pricing and margins and so forth, it held up a little better than Texas and Florida. Overall, we feel really good about where we are. Thank you.

Thanks.

Speaker 0

Your next question comes from Alan Ratner with Zelman & Associates. Your line is now open.

Hey, Bob. Hey, Phil. Good morning. Thanks for

Speaker 6

Morning, Alan.

Thank you for the information so far. Bob, a lot of chatter over the last few weeks about some tweets from our administration and the FHFA about the home builders' business. I'm just curious, have you had any discussions with the administration or have any thoughts on what some of the headlines are out there?

We have not had any discussions at this point, and nothing is currently planned for us. Obviously, we're aware of it. Look, I think the good news from my view, and this is both at the local and state level as well as federal, there's a lot of talk right now about what can be done to help unlock, if you will, housing, improve affordability. We're seeing it at a lot of different levels. I was in an event last night where that was the primary topic of discussion as it relates to markets in the Midwest. I'll be at an event in another week or two as it relates to just Ohio, where that is a primary topic. I think people understand how important housing is as a driver of the overall economy and that housing, while it's certainly by no means dead, is underperforming.

We need to be building more homes, and we need to make sure we do the smartest and best things to help create that environment. I think we'll get there eventually. If there could be some policies here or there at the local level, we certainly would welcome those. We have long said, and I think this view is widely shared, that the greatest impediment in our judgment to affordability and to improved volume levels is local zoning regulations. Some markets are more favorable than others, but that to me remains the biggest impediment. We're all sick of the NIMBY term, but the NIMBYism and the anti-growth, again, in some markets, the situation is more acute than in others. I think there's a reason why Texas has led the nation in housing production. I don't know if it's 15%, 18% of total new home production, but it's a big number.

I think in general, while it's not easy there either, there's just been a much more favorable zoning climate that has contributed to more development and, frankly, more affordability.

I appreciate that thought. Yeah, that seems to be the general sentiment so far, at least builders are happy to see it being talked about. Hopefully, there could be some real change implemented from whatever discussion.

Right. It's always bad when no one wants to talk to you. Be careful what you wish for. Yeah, as long as there's conversation, you got a chance.

Exactly. All right. A couple of quick ones on just the margin, both gross and SG&A. On gross margin, it looks like this quarter, obviously, things are still under a little bit of pressure, but it looks like things are stabilized a bit quarter over quarter. I know you don't guide, but maybe just if you could talk to the puts and takes going forward in terms of land costs flowing through. It sounds like construction costs are stable. Pricing and incentives, I mean, should we, are we kind of getting a little bit closer to the bottom here on margin, do you think, or is there more room for margins to drop in over the next handful of quarters?

I think we're a lot closer to the bottom than we were last quarter. How close are we? That remains to be seen. Look, going into this year, even though we didn't share this, internally, we believe that our margins would be under pressure somewhere, this was internal budgeting, between 200 and 300 basis points because we knew we were going to have to spend a lot of money on mortgage rate buy-downs, as we've talked about this call, second quarter, first quarter. Absent the impairments, they're about 250 basis points down year over year. Could they drop a little more? Perhaps. I think we're getting close to it to some point.

The other thing that's hard to gauge, and no one knows the answer to this, is, even though we may continue to be spending money on rate buy-downs, if the cost drops by 50 to 100 basis points, that's a big plus on the margin side. Phil, I don't know if you have anything to add on that.

Yeah. The pressures we have really, you know, as we said in the third quarter, we sold 75% specs. The second quarter was like 73%. It is up a little bit. In general, our specs have a lower average sale price than our to-be-builts, and they also have a lower margin. The amount of specs continues to be a pressure. Also, Bob mentioned higher land costs. We do have higher land costs coming through than we did a year ago. The good news is the last couple of quarters, land development costs, which actually were increasing more than the raw land, land development costs seem to have stabilized. Obviously, we're being very careful as far as buying new land parcels since we do feel very strong about our land position and also the choppy market conditions. We're doing all we can. You know, you're always market pricing.

We always need a certain amount of volume to come through. Overall, we think our margins are holding up pretty well, but again, there do continue to be pressures.

We have certain internal targets. We want to always have, hopefully, double-digit pre-tax income percentage. We were 12% for the quarter. Given the market, we feel really good about that. Given our size, we feel particularly good about our, you know, return on equity. It's lower than it was, you know, a year ago, but it's still a very, very, I think, respectable 16%. We've got minimum targets on that that we're hitting. We're going to keep aiming to hit those targets.

Absolutely. All right, guys. I appreciate all the thoughts and best of luck and happy holidays if we don't talk before then.

Yeah, take care of yourself, Alan.

Speaker 0

Your next question comes from Buck Horne with Raymond James. Your line is now open.

Good morning, guys. I wanted to go back to those regionals.

Speaker 6

Morning.

Good morning. I want to go to the regional splits on the order growth trends between the north and the south. If I heard correctly, I believe you still had higher year-over-year community count in the north region, but orders dropped off 17%. I know that it was a tough comp against last year. It sounded like markets like Columbus, Cincinnati, and Chicago were doing better. I am just wondering if you can add any color on that divergence in order trends.

We're very pleased with how well our Midwest markets have held up. They may be off from where they were a year ago, but I think we've got a very strong operation in Columbus, Cincinnati, and frankly, Indianapolis. I didn't call out Indianapolis, but we have a much improved operation in Indianapolis over where we were several years ago. Very bullish about that market as well. Chicago is having a very strong year for us, as is Minneapolis. Sometimes there's a little noise in these numbers, given when new communities open up, and you have to sort of look over a longer period of time. We remain bullish about the Midwest, bullish about the Carolinas. I don't think Florida's, you know, Florida has a few struggles here and there, particularly on, at least for us, on the West Coast.

Texas is a little bit of a transition, but there's still tremendous economic vitality, generally speaking, throughout nearly every one of our markets. We're a relative newcomer in Nashville. We've got high hopes for Nashville going forward. Lots of job growth there. Lots of projected household formations. Houston and Dallas continue to be very strong markets in terms of just total macroeconomic conditions, maybe off a little bit. I get that. Austin's slowly coming back. Generally, in migration still in Austin. Terrific place, glad we're there. If we weren't, we'd open up there. We feel very good about all of our markets. I think the diversity, you never hit, you know this, you never hit on all cylinders. If you do, it's lucky. There's always something somewhere. I think it's important to have the geographic diversity that we have.

I think it's particularly helpful to us right now, where there's a little bit of a slowdown in Florida and parts of Texas as well. The Midwest is, as a Midwesterner, I'm glad to see the Midwest standing pretty tall these days.

Hey, Bob, this is Phil. When you actually look at the numbers, as I said, our third-quarter sales overall really were pretty consistent, you know, 618 in July, 660 in August, and 630 in September. Last September, we sold like 775 homes. The Midwest was really strong last September for different reasons. We do run periodic sales events. Last September was the start of a sales event. That is really the reason that you're seeing the down sales quarter to quarter. The Midwest sales, as Bob said, really were fairly decent, pretty consistent through the quarter. It's really just last September was a little unusual.

Gotcha. That's very helpful color. I appreciate that. Yeah, thanks for all the details there. Really, really good. Going to G&A and kind of selling costs, I think one of your competitors noted that, you know, just in this competitive environment, there's a lot of spec homes that a lot of builders are trying to clear before year-end. One of the tools to utilize is more co-brokers, and you guys are utilizing more realtors to try to get those inventory homes cleared before year-end. Are you guys pursuing a similar strategy? Should we think about that being an added cost into the fourth quarter in terms of just selling expenses?

Phil's going to give you the best and most detailed answer, but I just want to say a couple of things first. We've got over 200 more completed specs today than we did a year ago at this time. It's probably a little more than we'd ideally like to have. We're very, very careful from a management standpoint on paying close attention to that broker co-op percentage. I wish, frankly, we welcome brokers. We need brokers. Company-wide, we're in the mid-70s, I think, 75%, 76%, maybe 77%. I don't know the exact percentage; Phil does. I wish it were lower. We have a lot of programs that we think are effective in bringing that down without alienating an important part of our selling efforts, which is the third-party brokers. Phil, I don't know if you want to comment any further.

Yeah. When you look at the SG&A, as I said, the actual expenses were up 6% versus a year ago. We have 7% more communities, and you do have cost for every store maintaining those stores. We have 3% more people. Again, you know, we have 7% more stores, those type of things. We also did have a slightly higher sales commission rate, internal and external, again, trying to drive traffic and sales. That's how we kind of get to that 6% increase, Bob.

One thing we have not done, there might be one or two minor exceptions. We're not out there incentivizing traffic or sales by offering more money to the third-party brokers. Some of our peers have. We're not doing that. We don't feel we need to do it. We also think that, it's like a lot of things in life. Once you start, it's hard to stop.

Right.

Yeah. All right. That's really helpful. Appreciate that, added color. My last, if I can sneak it in, is just, you know, given the strength of the balance sheet here and the cash position and, you know, the increased, you know, financial flexibility you've got with the credit facility, is there anything that's necessarily holding you back from, you know, accelerating repurchases into year-end, working capital needs or otherwise, or you just want to continue to be very programmatic and consistent on that?

Yeah. I'll say one thing, and then I think Phil's going to add to this, which he should. Job one is to grow the company and to do so with a very strong balance sheet. We thought we had a strong balance sheet back in 2004, 2005, and 2006, only to learn that we didn't. Our debt-to-cap was in the high 40s, low 50s. So were many of our peers. We're not going back to that movie. We're going to maintain a very, very strong balance sheet with comparatively low debt levels as we are right now. That is our goal going forward. We also want to grow the company. You know, when we have this excess cash and for all these other reasons, we think we can also, at the same time, without compromising growth, selectively buy back shares. Phil, I don't know if you want to add anything.

Exactly. We continue every quarter with our board to talk about stock repurchases and so forth. We have consistently, for the last few quarters, repurchased $15 million a quarter. As far as the bank line, the bank line was going to mature in December of 2026. We really did not want to get within a one-year window of that. We just thought for safety and flexibility, plus it now is a five-year term, we thought it made sense to go from $650 million to $900 million. We're definitely kind of low-leverage, conservative-type people. We do like to keep that leverage low, especially during these times. I do have 3,000 specs, compared to 2,300 or so a year ago. We think that makes a lot of sense in today's market, especially to take advantage of these mortgage rate buy-downs, which are a lot more effective in shorter periods of time.

We are just going to continue to adapt as best we can to market conditions. Keeping a strong balance sheet and strong liquidity is definitely job one.

All right, guys. Congrats. Good luck. Thanks. Thanks for the color.

Thanks so much.

Speaker 0

Ladies and gentlemen, as a reminder, should you have a question, please press star one. Your next question comes from Jay McCanless with Wedbush Securities. Your line is now open.

Hey, good morning, guys. I just wanted to ask.

Speaker 6

Morning, Jay.

Morning. I just wanted to ask where your gross margins are right now on spec versus your build-to-order homes?

They're a little lower. It really depends on the community. Every location is a little different, but in general, they're just a little lower than to-be-builts.

Bob, you were talking about some of your competitors' increase in co-broker spend. In terms of some of the larger competitors who said they might be pulling back a little bit, are you seeing any evidence of that in the field, or is everyone selling pretty hard to get lighter ahead of the spring season?

I don't think I made a comment about pulling back. What I said is that we have not elected to pay brokers more to drive traffic and incentive sales. Our co-op rate has remained consistent throughout all of our divisions, probably over the last five years. We've tried to be very consistent on that. We do what we can to have the best relationships we can, but I'm not interested in buying the business and fearful of how you go back to where you once were if you start that, as I made comment. I don't know if, and I'm not saying a lot are doing it, but I know there's a few examples out there of some that are. Whether they've pulled back, I don't know. I don't have current information on that. What was the other part of your question?

Are people, we've heard that some of your competitors are slowing down starts, but at the same time, we're hearing a lot of conversation about aggressively selling into year-end. To me, it feels like this is just a normal year where the industry is a little heavy on inventory. People are going to have to sell aggressively into year-end. Is that what you're seeing out in the field right now, or are people being a little more reasoned with some of the discounts and incentives they're trying to offer?

That's always a community-by-community discussion. I mean, some builders, 100% spec, they're fairly aggressive. Some are not. It just depends on the location, etc. You just need to be aware of what's going on in the marketplace. Getting back to kind of our sales effort, we're trying to focus very much on internally to make sure we're getting all the leads that we can, that we follow up on the leads as best we can. We have more people focused on those leads. We have, in most of our communities, more than one salesperson. We try to be focused very much on controlling all the things we can control. We're spending more money today on sales training and driving leads online than we have in a long, long time. We're going to continue to.

That's the blocking and tackling of our business. I don't often mention that on calls like this, but I'd rather spend money on that than on realtors. I'd rather spend money on that than on incentives. We may have to do both sometime, but it all starts with us. It's easy to get complacent during hot markets. Now more than ever, focusing on us is just absolutely the most important thing we can do.

We have an opportunity. Last year we opened about 75 stores. This year we're going to open more than 75 stores. Different location, different product, different price point in many situations, those are things we control. Those are the things we focus on every day. We do have higher spec limits. We don't accept going in that specs have to be a lower margin. Hopefully, we're putting the best products on the best lots and that we're getting paid for that because that's the way the business is right now.

I want to give a very specific example. I bragged about the fact that our mortgage and title operations had a tremendous quarter because they did. I mentioned that we had a record capture rate of 93%. I think a year ago it was like 84% or something like 89%. On the one hand, you could say it should be higher, because you're so aggressively using mortgage rate buy-downs. That is true. It should be higher. I think it's even higher than it would be because of the training and the efforts that we're putting on the side of making certain that at each branch, each mortgage and mortgage branch, we're doing the best we can to help people figure out the financing that's best for them in this somewhat challenging market. We could easily be happy with a capture rate of 85% or 88%.

It would probably be at or near best in class. With this higher capture rate, not only does that contribute to profitability, but we think it's contributing to sales performance.

Every buyer is different. Some buyers, especially more affordable homes, may very well need help in closing costs. Some buyers do need help. They want a 30-year fixed, lowest rate possible. Some buyers are okay with ARMs. Some are okay with buydowns. It just depends on what the customer needs. We're not just throwing the most money at every deal we have.

Understood. Thank you for that. I guess the last one for me, with the balance sheet as strong as it is right now, is there any thought to doing some M&A, especially in the Midwest, down into the Carolinas where you're already seeing pretty strong performance?

There's nothing on the horizon. You know, if something happened to show up in one of our existing markets or perhaps in a market that we're not in that we thought made a lot of sense, I think we'd take a very serious look at it. I mean, in the last six months, we've probably looked at a couple of deals. Right now, our job is to make sure we keep our balance sheet really strong, to your point, and to grow in our existing markets. Every one of our existing markets has growth goals. We've said this before, and I'll say it again right now. Our run rate today is around 9,000 units.

You know, we believe in the 17 markets that we're in that we can grow to 13,000 or 14,000 units without opening up in any new markets, just with the headroom that we have within our existing geographic footprint. If we could grow that way, that would be the one that would be the most desirable. On the other hand, if something showed up and it made sense, we'd analyze it like any other land deal or opportunity, but there's nothing planned at this point.

Okay, and then one more just to kind of follow on that. Any inclination to talk about 2026 community count, especially with the amount of lots you guys have built up? It feels like y'all could grow count and possibly unit volumes in 2026. Any thoughts on that?

You mean you're asking for guidance on projected community count growth for 2026?

I would never ask you for guidance, Bob. I'm just asking for how you're feeling about potential growth for next year.

I think there will be community count growth next year.

Yeah. I mean, we own 24,000 lots.

We expect to have community count next year.

Our target is always to grow community count in that 5% to 10% range a year. Like I said, last year was 7%. This year is probably going to be about 5%. Even though we've slowed land purchases down the last couple of quarters, we're still in great shape to continue growth.

Sounds great. Okay, thanks, guys. Appreciate it.

Thanks, Jay. Appreciate it.

Speaker 0

There are no further questions at this time. I will now turn the call over to Phil for closing remarks.

Speaker 6

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

Speaker 0

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.