ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
M/I Homes, Inc. and subsidiaries (the “Company” or “we”) is one of the nation’s leading builders of single-family homes having sold over 130,800 homes since commencing homebuilding activities in 1976. The Company’s homes are marketed and sold primarily under the M/I Homes brand. The Company has homebuilding operations in Columbus and Cincinnati, Ohio; Indianapolis, Indiana; Chicago, Illinois; Minneapolis/St. Paul, Minnesota; Detroit, Michigan; Tampa, Sarasota and Orlando, Florida; Austin, Dallas/Fort Worth, Houston and San Antonio, Texas; and Charlotte and Raleigh, North Carolina.
Included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are the following topics relevant to the Company’s performance and financial condition:
•Information Relating to Forward-Looking Statements;
•Application of Critical Accounting Estimates and Policies;
•Results of Operations;
•Discussion of Our Liquidity and Capital Resources;
•Summary of Our Contractual Obligations;
•Discussion of Our Utilization of Off-Balance Sheet Arrangements; and
•Impact of Interest Rates and Inflation.
FORWARD-LOOKING STATEMENTS
Certain information included in this report or in other materials we have filed or will file with the Securities and Exchange Commission (the “SEC”) (as well as information included in oral statements or other written statements made or to be made by us) contains or may contain forward-looking statements, including, but not limited to, statements regarding our future financial performance and financial condition. Words such as “expects,” “anticipates,” “envisions,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of such words and similar expressions are intended to identify such forward-looking statements. Forward-looking statements involve a number of risks and uncertainties. Any forward-looking statements that we make herein and in future reports and statements are not guarantees of future performance, and actual results may differ materially from those in such forward-looking statements as a result of various risk factors, including, without limitation, factors relating to the economic environment, the impact of the COVID-19 pandemic, interest rates, availability of resources, competition, market concentration, land development activities, construction defects, product liability and warranty claims and various governmental rules and regulations. See “Item 1A. Risk Factors” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”), as the same may be updated from time to time in our subsequent filings with the SEC, for more information regarding those risk factors.
Any forward-looking statement speaks only as of the date made. Except as required by applicable law, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in our subsequent reports on Forms 10-K, 10-Q and 8-K should be consulted. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995, and all of our forward-looking statements are expressly qualified in their entirety by the cautionary statements contained or referenced in this section.
APPLICATION OF CRITICAL ACCOUNTING ESTIMATES AND POLICIES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Management bases its estimates and assumptions on historical experience and various other factors that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. On an ongoing basis, management evaluates such estimates and assumptions and makes adjustments as deemed necessary. Actual results could differ from these estimates using different estimates and assumptions, or if conditions are significantly different in the future. See Note 1 (Summary of Significant Accounting Policies) to our consolidated financial statements included in our 2020 Form 10-K for additional information about our accounting policies.
We believe that there have been no significant changes to our critical accounting policies during the quarter ended March 31, 2021 as compared to those disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2020 Form 10-K.
RESULTS OF OPERATIONS
Our reportable segments are: Northern homebuilding; Southern homebuilding; and financial services operations. The homebuilding operating segments that comprise each of our reportable segments are as follows:
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Northern
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Southern
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Chicago, Illinois
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Orlando, Florida
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Cincinnati, Ohio
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Sarasota, Florida
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Columbus, Ohio
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Tampa, Florida
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Indianapolis, Indiana
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Austin, Texas
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Minneapolis/St. Paul, Minnesota
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Dallas/Fort Worth, Texas
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Detroit, Michigan
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Houston, Texas
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San Antonio, Texas
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Charlotte, North Carolina
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Raleigh, North Carolina
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Overview
For the first quarter of 2021, we achieved all-time quarterly records for new contracts and income before income taxes along with first quarter record revenue and number of homes delivered. We also achieved all-time record level backlog sales value and units at March 31, 2021. Our improved profitability is attributable primarily to the increase in homes delivered, improved margins and overhead leverage. Additionally, our complementary financial services business also achieved record revenue and income before income taxes, and originated a record number of loans during the first quarter of 2021, while benefiting from a higher margin per loan originated.
We believe that the homebuilding industry benefited from low interest rates, a continued undersupply of available homes and a heightened demand for home ownership as many consumers move from rental apartments and densely populated areas to single family homes in suburban locations. We further believe these factors will continue to support strong demand throughout 2021, subject to any negative impact related to the COVID-19 pandemic or increases in mortgage rates.
During the three months ended March 31, 2021, we achieved the following record results in comparison to the first quarter of 2020:
•New contracts increased 49% to 3,109 (an all-time quarterly record)
•Homes delivered increased 35% to 2,019 homes (a first quarter record)
•Number of homes in backlog at March 31, 2021 increased 68% to an all-time record 5,479 homes
•Total sales value in backlog increased 82% to $2.4 billion, an all-time record
•Revenue increased 43% to $828.8 million (a first quarter record)
•Income before income taxes increased 167% to $110.3 million (an all-time quarterly record)
•Net income increased 167% to $84.9 million (a first quarter record)
In addition to the results described above, our financial services operations also achieved record income before income taxes for the first quarter, benefiting from an increase in homes closed, the number of mortgages originated and higher margins, as well as technology enabled efficiencies. Our company-wide absorption pace of sales per community for the first quarter of 2021 improved to 5.3 per month compared to 3.1 per month for the prior year’s first quarter. Partially as a result of this accelerated sales pace, our number of active communities declined to 187 from 223 at the end of the first quarter of 2020 and from 202 at the end of 2020’s fourth quarter. We believe we maintain a strong land position, and we continue to place additional land under contract for communities that will be brought online in future periods. However, our ability to replace existing communities in the short-term that are selling out faster than we anticipated could negatively impact our number of active communities in 2021 and thus also reduce our ability to meet current demand. We continue to work to open new communities to grow our community count and we are also actively managing sales pace, in part by selectively increasing prices and limiting sales in communities, to optimize our availability of lots and returns in each of our communities.
Summary of Company Financial Results
Income before income taxes for the first quarter of 2021 increased 167% from $41.4 million in the first quarter of 2020 to an all-time quarterly record $110.3 million in 2021. We achieved first quarter net income of $84.9 million, or $2.85 per diluted share, in 2021's first quarter, a 167% increase, or $53.1 million, from net income of $31.7 million, or $1.09 per diluted share, in 2020's first quarter. Our effective tax rate was 23.0% in 2021’s first quarter compared to 23.2% in 2020.
During the quarter ended March 31, 2021, we recorded first quarter record total revenue of $828.8 million, of which $798.3 million was from homes delivered, $0.8 million was from land sales and $29.6 million was from our financial services operations. Revenue from homes delivered increased 43% in 2021's first quarter compared to the same period in 2020 driven primarily by a 35% increase in the number of homes delivered (524 units) in addition to a 6% increase in the average sales price of homes delivered ($21,000 per home delivered), which was primarily the result of improved demand. Revenue from land sales decreased $3.8 million from the first quarter of 2020 primarily due to fewer land sales in our Southern region in 2021's first quarter compared to the prior year. Revenue from our financial services segment increased 120% to an all-time quarterly record $29.6 million in the first quarter of 2021 as a result of an increase in loans closed and sold as well as higher margins on loans sold during the period compared to prior year.
Total gross margin (total revenue less total land and housing costs) increased $85.5 million in the first quarter of 2021 compared to the first quarter of 2020 as a result of a $69.3 million improvement in the gross margin of our homebuilding operations and a $16.2 million improvement in the gross margin of our financial services operations. With respect to our homebuilding gross margin, our gross margin on homes delivered (housing gross margin) improved $69.1 million primarily as a result of the 35% increase in the number of homes delivered. Our housing gross margin percentage improved 320 basis points from 18.4% in prior year's first quarter to 21.6% in 2021's first quarter, primarily as a result of improved demand during 2021's first quarter. Our gross margin on land sales (land sale gross margin) improved $0.2 million in the first quarter of 2021 compared to the first quarter of 2020. The gross margin of our financial services operations increased $16.2 million in the first quarter of 2021 compared to the first quarter of 2020 as a result of increases in the number of loan originations and the average loan amount, in addition to higher margins on loans sold during the first quarter of 2021 compared to the first quarter of 2020.
We opened 21 new communities during the first quarter of 2021. We sell a variety of home types in various communities and markets, each of which yields a different gross margin. The timing of the openings of new replacement communities as well as underlying lot costs varies from year to year. As a result, our new contracts and housing gross margin may fluctuate up or down from quarter to quarter depending on the mix of communities delivering homes. As a result of the record number of sales in 2020 and during the first quarter of 2021, we are selling through communities faster; therefore, our ability to replace existing communities timely could impact our ability to meet current demand and negatively impact our number of active communities.
For the three months ended March 31, 2021, selling, general and administrative expense increased $20.2 million, which partially offset the increase in our gross margin dollars discussed above, but declined as a percentage of revenue from 12.2% in the three months ended March 31, 2020 to 11.0% in the first three months of 2021. Selling expense increased $8.9 million from the first quarter of 2020 but improved as a percentage of revenue to 5.5% in 2021's first quarter from 6.4% for the same period in 2020. Variable selling expense for sales commissions contributed $9.1 million to the increase due to the higher number of homes delivered year to date. The increase in selling expense was partially offset by a $0.2 million decrease in non-variable selling expense primarily related to the timing of sales office and model openings and a reduction in marketing costs. General and administrative expense increased $11.3 million compared to the first quarter of 2020 but declined as a percentage of revenue from 5.9% in the three months ended March 31, 2020 to 5.5% in the first three months of 2021. The dollar increase in general and administrative expense was primarily due to a $8.5 million increase in compensation-related expenses due to our increased headcount and our strong financial performance during the period, a $1.7 million increase in land-related expenses, a
$0.4 million increase in computer costs related to our investment in new information systems, and a $0.7 million increase in miscellaneous expenses.
Outlook
We believe that new home sales will continue to benefit from low interest rates, a continued undersupply of available homes and consumer demographics, including a growing number of homebuyers moving from rental apartments and more densely populated areas to single family homes in suburban locations. However, while overall economic conditions in the United States are recovering and housing conditions are currently favorable, such conditions, including the level of employment, secondary mortgage markets, consumer confidence and availability of mortgage loans, could be negatively impacted by adverse developments related to the COVID-19 pandemic or increases in mortgage rates.
In the first quarter of 2021, we continued to experience cost increases in certain construction materials, particularly lumber, that began in the latter part of 2020 and continue to actively manage and monitor those costs. We have been able to raise home prices in many of our communities to offset these cost increases and preserve or increase our margins. During the first quarter, our ability to raise prices, together with cost management, allowed us to achieve a total gross margin percentage of 24.4%, an improvement of 420 basis points compared with 2020’s first quarter. We may experience future shortages in materials and labor as well as price increases for materials and labor and may not be able to maintain our current level of direct construction costs as a percentage of average sales price. We remain sensitive to changes in market conditions, and continue to focus on controlling overhead leverage and carefully managing our investment in land and land development spending.
Also due to strong overall housing demand, we have experienced periodic disruptions in our supply chain, including the availability of skilled labor and the timely availability of certain products such as lumber, cabinets and appliances which have lengthened the production cycles in certain markets. During the first quarter of 2021, we were able to manage through these disruptions, but we cannot predict the extent to which any such disruptions will affect our business in the remainder of 2021.
We expect to emphasize the following strategic business objectives throughout the remainder of 2021:
•managing our land spend and inventory levels;
•manage our community sales pace to maximize returns;
•accelerating the readiness of new communities wherever possible;
•maintaining a strong balance sheet and liquidity levels;
•expanding the availability of our more affordable Smart Series homes; and
•emphasizing customer service, product quality and design, and premier locations.
During the first three months of 2021, we invested $92.4 million in land acquisitions and $71.2 million in land development. We continue to closely review all of our land acquisition and land development spending and monitor our ongoing pace of home sales and deliveries, including any potential effects as a result of the COVID-19 pandemic, and we will adjust our land spending and investment in inventory homes accordingly. As a result of the uncertainty of the current economic recovery and the continued uncertainty arising from the COVID-19 pandemic and its impact on overall economic and housing conditions, we are not providing land spending estimates for 2021 at this time.
We are also not providing estimated community count information for 2021 at this time due to the uncertainty of the current environment and the unknown effects on the specific timing of opening and closing out communities. As a result of our accelerated pace of home sales, we are selling through communities at a faster pace, which is making it challenging to maintain our targeted number of active communities in 2021. We ended 2021’s first quarter with approximately 42,000 lots under control, which represents a 24% increase from our approximately 33,800 lots under control at the end of 2020’s first quarter. We opened 21 communities and closed 36 communities in the first quarter of 2021, ending the first quarter with a total of 187 communities, compared to 223 at the end of last year’s first quarter. Of our total communities at the end of the first quarter of 2021, 61 offered our more affordable Smart Series designs, which are primarily designed for first-time homebuyers. We are actively managing our sales pace to maximize returns in each of our communities.
We believe our ability to design and develop attractive homes in desirable locations at an affordable cost, and to grow our business while also leveraging our fixed costs, has enabled us to maintain and improve our strong financial results. We further believe that we are well positioned with a strong balance sheet to manage through the current economic environment.
The following table shows, by segment, revenue; gross margin; selling, general and administrative expense; operating income (loss); and interest expense for the three months ended March 31, 2021 and 2020:
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Three Months Ended March 31,
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(In thousands)
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2021
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2020
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Revenue:
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Northern homebuilding
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$
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332,998
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$
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240,270
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Southern homebuilding
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466,129
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323,866
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Financial services (a)
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29,649
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13,467
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Total revenue
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$
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828,776
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$
|
577,603
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Gross margin:
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Northern homebuilding
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$
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66,563
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$
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42,558
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Southern homebuilding
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105,979
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60,654
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Financial services (a)
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29,649
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13,467
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Total gross margin
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$
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202,191
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$
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116,679
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Selling, general and administrative expense:
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Northern homebuilding
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$
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27,579
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$
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21,677
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Southern homebuilding
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39,764
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31,797
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Financial services (a)
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9,013
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7,105
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Corporate
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14,538
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10,096
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Total selling, general and administrative expense
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$
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90,894
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$
|
70,675
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Operating income (loss):
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Northern homebuilding
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$
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38,984
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$
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20,881
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Southern homebuilding
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66,215
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28,857
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Financial services (a)
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20,636
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6,362
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Less: Corporate selling, general and administrative expense
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(14,538)
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(10,096)
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Total operating income
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$
|
111,297
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$
|
46,004
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Interest expense:
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Northern homebuilding
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$
|
76
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$
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1,811
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|
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|
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Southern homebuilding
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157
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|
|
2,158
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Financial services (a)
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943
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|
731
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Total interest expense
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$
|
1,176
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$
|
4,700
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Equity in income of joint venture arrangements
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(160)
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(52)
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Income before income taxes
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$
|
110,281
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|
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$
|
41,356
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(a)Our financial services operational results should be viewed in connection with our homebuilding business as its operations originate loans and provide title services primarily for our homebuying customers, with the exception of a small amount of mortgage refinancing.
The following tables show total assets by segment at March 31, 2021 and December 31, 2020:
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At March 31, 2021
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(In thousands)
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Northern
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Southern
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Corporate, Financial Services and Unallocated
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Total
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Deposits on real estate under option or contract
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$
|
5,720
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|
|
$
|
36,844
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|
$
|
—
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|
|
$
|
42,564
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|
|
Inventory (a)
|
843,821
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|
|
1,074,149
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|
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—
|
|
|
1,917,970
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Investments in joint venture arrangements
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—
|
|
|
33,822
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|
|
—
|
|
|
33,822
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Other assets
|
40,320
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|
|
84,648
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|
(b)
|
590,236
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|
|
715,204
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Total assets
|
$
|
889,861
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|
|
$
|
1,229,463
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|
|
$
|
590,236
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|
|
$
|
2,709,560
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At December 31, 2020
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(In thousands)
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Northern
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Southern
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Corporate, Financial Services and Unallocated
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Total
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Deposits on real estate under option or contract
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$
|
5,031
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|
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$
|
40,326
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$
|
—
|
|
|
$
|
45,357
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|
|
Inventory (a)
|
847,524
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|
|
1,023,727
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|
|
—
|
|
|
1,871,251
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|
|
Investments in joint venture arrangements
|
1,378
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|
|
33,295
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|
|
—
|
|
|
34,673
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Other assets
|
37,465
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|
|
57,588
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|
(b)
|
596,711
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|
|
691,764
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|
|
Total assets
|
$
|
891,398
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|
|
$
|
1,154,936
|
|
|
$
|
596,711
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|
|
$
|
2,643,045
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|
(a)Inventory includes single-family lots; land and land development costs; land held for sale; homes under construction; model homes and furnishings; community development district infrastructure; and consolidated inventory not owned.
(b)Includes development reimbursements from local municipalities.
Reportable Segments
The following table presents, by reportable segment, selected operating and financial information as of and for the three months ended March 31, 2021 and 2020:
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|
|
|
|
|
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|
Three Months Ended March 31,
|
|
|
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(Dollars in thousands)
|
2021
|
|
2020
|
|
|
|
|
|
|
|
Northern Region
|
|
|
|
|
|
|
|
|
|
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Homes delivered
|
801
|
|
|
588
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|
|
|
|
|
|
|
|
New contracts, net
|
1,306
|
|
|
853
|
|
|
|
|
|
|
|
|
Backlog at end of period
|
2,320
|
|
|
1,408
|
|
|
|
|
|
|
|
|
Average sales price of homes delivered
|
$
|
415
|
|
|
$
|
407
|
|
|
|
|
|
|
|
|
Average sales price of homes in backlog
|
$
|
452
|
|
|
$
|
423
|
|
|
|
|
|
|
|
|
Aggregate sales value of homes in backlog
|
$
|
1,048,764
|
|
|
$
|
596,138
|
|
|
|
|
|
|
|
|
Housing revenue
|
$
|
332,808
|
|
|
$
|
239,548
|
|
|
|
|
|
|
|
|
Land sale revenue
|
$
|
190
|
|
|
$
|
722
|
|
|
|
|
|
|
|
|
Operating income homes (a)
|
$
|
38,928
|
|
|
$
|
20,835
|
|
|
|
|
|
|
|
|
Operating income land
|
$
|
56
|
|
|
$
|
46
|
|
|
|
|
|
|
|
|
Number of average active communities
|
89
|
|
|
97
|
|
|
|
|
|
|
|
|
Number of active communities, end of period
|
87
|
|
|
98
|
|
|
|
|
|
|
|
|
Southern Region
|
|
|
|
|
|
|
|
|
|
|
Homes delivered
|
1,218
|
|
|
907
|
|
|
|
|
|
|
|
|
New contracts, net
|
1,803
|
|
|
1,236
|
|
|
|
|
|
|
|
|
Backlog at end of period
|
3,159
|
|
|
1,857
|
|
|
|
|
|
|
|
|
Average sales price of homes delivered
|
$
|
382
|
|
|
$
|
353
|
|
|
|
|
|
|
|
|
Average sales price of homes in backlog
|
$
|
419
|
|
|
$
|
380
|
|
|
|
|
|
|
|
|
Aggregate sales value of homes in backlog
|
$
|
1,325,064
|
|
|
$
|
705,188
|
|
|
|
|
|
|
|
|
Housing revenue
|
$
|
465,471
|
|
|
$
|
319,901
|
|
|
|
|
|
|
|
|
Land sale revenue
|
$
|
658
|
|
|
$
|
3,965
|
|
|
|
|
|
|
|
|
Operating income homes (a)
|
$
|
66,021
|
|
|
$
|
28,834
|
|
|
|
|
|
|
|
|
Operating income land
|
$
|
194
|
|
|
$
|
23
|
|
|
|
|
|
|
|
|
Number of average active communities
|
106
|
|
|
127
|
|
|
|
|
|
|
|
|
Number of active communities, end of period
|
100
|
|
|
125
|
|
|
|
|
|
|
|
|
Total Homebuilding Regions
|
|
|
|
|
|
|
|
|
|
|
Homes delivered
|
2,019
|
|
|
1,495
|
|
|
|
|
|
|
|
|
New contracts, net
|
3,109
|
|
|
2,089
|
|
|
|
|
|
|
|
|
Backlog at end of period
|
5,479
|
|
|
3,265
|
|
|
|
|
|
|
|
|
Average sales price of homes delivered
|
$
|
395
|
|
|
$
|
374
|
|
|
|
|
|
|
|
|
Average sales price of homes in backlog
|
$
|
433
|
|
|
$
|
399
|
|
|
|
|
|
|
|
|
Aggregate sales value of homes in backlog
|
$
|
2,373,828
|
|
|
$
|
1,301,326
|
|
|
|
|
|
|
|
|
Housing revenue
|
$
|
798,279
|
|
|
$
|
559,449
|
|
|
|
|
|
|
|
|
Land sale revenue
|
$
|
848
|
|
|
$
|
4,687
|
|
|
|
|
|
|
|
|
Operating income homes (a)
|
$
|
104,949
|
|
|
$
|
49,669
|
|
|
|
|
|
|
|
|
Operating income land
|
$
|
250
|
|
|
$
|
69
|
|
|
|
|
|
|
|
|
Number of average active communities
|
195
|
|
|
224
|
|
|
|
|
|
|
|
|
Number of active communities, end of period
|
187
|
|
|
223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)Includes the effect of total homebuilding selling, general and administrative expense for the region as disclosed in the first table set forth in this “Outlook” section.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
(Dollars in thousands)
|
2021
|
|
2020
|
|
|
|
|
|
Financial Services
|
|
|
|
|
|
|
|
|
Number of loans originated
|
1,575
|
|
|
1,131
|
|
|
|
|
|
|
Value of loans originated
|
$
|
515,877
|
|
|
$
|
345,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
29,649
|
|
|
$
|
13,467
|
|
|
|
|
|
|
Less: Selling, general and administrative expenses
|
9,013
|
|
|
7,105
|
|
|
|
|
|
|
Less: Interest expense
|
943
|
|
|
731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
$
|
19,693
|
|
|
$
|
5,631
|
|
|
|
|
|
A home is included in “new contracts” when our standard sales contract is executed. “Homes delivered” represents homes for which the closing of the sale has occurred. “Backlog” represents homes for which the standard sales contract has been executed, but which are not included in homes delivered because closings for these homes have not yet occurred as of the end of the period specified.
The composition of our homes delivered, new contracts, net and backlog is constantly changing and may be based on a dissimilar mix of communities between periods as new communities open and existing communities wind down. Further, home types and individual homes within a community can range significantly in price due to differing square footage, option selections, lot sizes and quality and location of lots. These variations may result in a lack of meaningful comparability between homes delivered, new contracts, net and backlog due to the changing mix between periods.
Cancellation Rates
The following table sets forth the cancellation rates for each of our homebuilding segments for the three months ended March 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2021
|
|
2020
|
|
|
|
|
|
Northern
|
6.3
|
%
|
|
9.7
|
%
|
|
|
|
|
|
Southern
|
7.9
|
%
|
|
12.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cancellation rate
|
7.2
|
%
|
|
11.3
|
%
|
|
|
|
|
Seasonality
Typically, our homebuilding operations experience significant seasonality and quarter-to-quarter variability in homebuilding activity levels. In general, homes delivered increase substantially in the second half of the year compared to the first half of the year. We believe that this seasonality reflects the tendency of homebuyers to shop for a new home in the spring with the goal of closing in the fall or winter, as well as the scheduling of construction to accommodate seasonal weather conditions. Our financial services operations also experience seasonality because loan originations correspond with the delivery of homes in our homebuilding operations. Additionally, given the disruption in economic activity caused by the COVID-19 pandemic, our results for the three months ended March 31, 2021 are not necessarily indicative of the results that we may achieve in future periods.
Year Over Year Comparison
Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020
Northern Region. During the first quarter of 2021, homebuilding revenue in our Northern region increased $92.7 million, from $240.3 million in the first three months of 2020 to $333.0 million in the first three months of 2021. This 39% increase in homebuilding revenue was the result of a 36% increase in the number of homes delivered (213 units) in addition to a 2% increase in the average sales price of homes delivered ($8,000 per home delivered), partially offset by a $0.5 million decrease in land sale revenue. Operating income in our Northern region increased $18.1 million, from $20.9 million during the first quarter of 2020 to $39.0 million during the three months ended March 31, 2021. The increase in operating income was primarily the result of a $24.0 million increase in our gross margin, offset, in part, by a $5.9 million increase in selling, general, and administrative expense. With respect to our homebuilding gross margin, our housing gross margin improved $24.0 million, primarily due to the 36% increase in the number of homes delivered. Our housing gross margin percentage improved 230 basis points from 17.7% in the first three months of 2020 to 20.0% for the same period in 2021, primarily due to improved demand compared to the prior year. Our land sale gross margin remained flat in the first quarter of 2021 compared to the same period in 2020.
Selling, general and administrative expense increased $5.9 million, from $21.7 million for the three months ended March 31, 2020 to $27.6 million for the three months ended March 31, 2021, and declined as a percentage of revenue to 8.3% in the first quarter of 2021 compared to 9.0% in the same period in 2020. The increase in selling, general and administrative expense was attributable, in part, to a $3.6 million increase in variable selling expenses resulting from increases in sales commissions produced by the higher number of homes delivered. The increase in selling, general and administrative expense was also attributable to a $2.3 million increase in general and administrative expense, which was primarily related to a $1.2 million increase in compensation-related expense due to our improved performance during the period and a $1.1 million increase in land-related expenses.
During the three months ended March 31, 2021, we experienced a 53% increase in new contracts in our Northern region, from 853 in the three months ended March 31, 2020 to 1,306 in the first quarter of 2021, and a 65% increase in homes in backlog from 1,408 homes at March 31, 2020 to 2,320 homes at March 31, 2021. The increases in new contracts and homes in backlog were due to improved demand compared to prior year. Average sales price in backlog increased to $452,000 at March 31, 2021 compared to $423,000 at March 31, 2020, which was primarily due to improved demand compared to prior year. During the three months ended March 31, 2021, we opened 13 new communities in our Northern region compared to nine during the same period in 2020. Our monthly absorption rate in our Northern region improved to 4.9 per community in the three months ended March 31, 2021 from 2.9 per community in the same period in 2020.
Southern Region. During the three months ended March 31, 2021, homebuilding revenue in our Southern region increased $142.2 million from $323.9 million in the first quarter of 2020 to $466.1 million in the first quarter of 2021. This 44% increase in homebuilding revenue was the result of a 34% increase in the number of homes delivered (311 units) and an 8% increase in the average sales price of homes delivered ($29,000 per home delivered), offset partially by a $3.3 million decrease in land sale revenue. Operating income in our Southern region increased $37.3 million from $28.9 million in the first quarter of 2020 to $66.2 million during the three months ended March 31, 2021. This increase in operating income was the result of a $45.3 million improvement in our gross margin offset, in part, by a $8.0 million increase in selling, general, and administrative expense. With respect to our homebuilding gross margin, our gross margin on homes delivered improved $45.1 million, due primarily to the 34% increase in the number of homes delivered noted above. Our housing gross margin percentage improved 370 basis points from 19.0% in the three months ended March 31, 2020 to 22.7% in the same period in 2021, largely due to improved demand compared to prior year. Our land sale gross margin improved $0.2 million in the first quarter of 2021 compared to the same period in 2020. We did not record any additional warranty charges for stucco-related repair costs in our Florida communities during the first quarter of 2021. With respect to this matter, during the quarter ended March 31, 2021, we identified 19 additional homes in need of repair and completed repairs on 25 homes, and, at March 31, 2021, we have 110 homes in various stages of repair. See Note 6 to our financial statements for further information.
Selling, general and administrative expense increased $8.0 million from $31.8 million in the first quarter of 2020 to $39.8 million in the first quarter of 2021 but declined as a percentage of revenue to 8.5% compared to 9.8% for the first quarter of 2020. The increase in selling, general and administrative expense was attributable to a $5.0 million increase in selling expense due to a $5.5 million increase in variable selling expenses resulting from increases in sales commissions produced by the higher number of homes delivered, offset partially by a $0.5 million decrease in non-variable selling expenses primarily related to the timing of sales office and model openings and a reduction in marketing costs. The increase in selling, general and administrative expense was also attributable to a $3.0 million increase in general and administrative expense, which was primarily related to a $2.4 million increase in incentive compensation due to our improved performance and a $0.6 million increase in land-related expenses.
During the three months ended March 31, 2021, we experienced a 46% increase in new contracts in our Southern region, from 1,236 in the three months ended March 31, 2020 to 1,803 in the first quarter of 2021, and a 70% increase in backlog from 1,857 homes at March 31, 2020 to 3,159 homes at March 31, 2021. The increases in new contracts and backlog were primarily due to improved demand compared to prior year. Average sales price in backlog also increased from $380,000 at March 31, 2020 to $419,000 at March 31, 2021 due to improved demand. During the three months ended March 31, 2021, we opened eight communities in our Southern region, the same number as during first quarter of 2020. Our monthly absorption rate in our Southern region improved to 5.7 per community in the first quarter of 2021 from 3.2 per community in the first quarter of 2020.
Financial Services. Revenue from our mortgage and title operations increased $16.2 million (120%) from $13.5 million in the first quarter of 2020 to $29.6 million in the first quarter of 2021 due to a 39% increase in the number of loan originations from 1,131 in the first quarter of 2020 to 1,575 in the first quarter of 2021 and an increase in the average loan amount from $306,000 in the three months ended March 31, 2020 to $328,000 in the three months ended March 31, 2021. We also experienced higher margins on loans sold during the period compared to 2020's first quarter.
We experienced a $14.3 million increase in operating income in the first quarter of 2021 compared to the same period in 2020, which was primarily due to the increase in revenue discussed above offset partially by a $1.9 million increase in selling, general and administrative expense compared to the first quarter of 2020. The increase in selling, general and administrative expense was primarily attributable to an increase in compensation expense related to an increase in employee headcount and an increase in incentive compensation due to improved results.
At March 31, 2021, M/I Financial provided financing services in all of our markets. Approximately 84% of our homes delivered during the first quarter of 2021 were financed through M/I Financial, compared to 85% in the first quarter of 2020. Capture rate is influenced by financing availability and can fluctuate from quarter to quarter.
Corporate Selling, General and Administrative Expense. Corporate selling, general and administrative expense increased $4.4 million from $10.1 million for the three months ended March 31, 2020 to $14.5 million for the three months ended March 31, 2021. The increase was primarily due to a $3.4 million increase in incentive compensation expense due to improved results during the period, a $0.5 million increase due to computer costs, and a $0.5 million increase in miscellaneous expenses.
Equity in Income from Joint Venture Arrangements. The Company earned $0.2 million and less than $0.1 million of equity in income from its LLCs during the three months ended March 31, 2021 and 2020, respectively.
Interest Expense - Net. Interest expense for the Company decreased $3.5 million from $4.7 million in the three months ended March 31, 2020 to $1.2 million in the three months ended March 31, 2021. This decrease was primarily the result of a decrease in average borrowings under our Credit Facility (as defined below) during the first quarter of 2021 compared to prior year. Our weighted average borrowings decreased from $768.1 million in the first quarter of 2020 to $707.9 million in the first quarter of 2021, and our weighted average borrowing rate declined from 6.17% in 2020's first quarter to 5.72% in 2021's first quarter.
Income Taxes. Our overall effective tax rate was 23.0% for the three months ended March 31, 2021 and 23.2% for the three months ended March 31, 2020.
LIQUIDITY AND CAPITAL RESOURCES
Overview of Capital Resources and Liquidity.
At March 31, 2021, we had $292.9 million of cash, cash equivalents and restricted cash, with $292.4 million of this amount comprised of unrestricted cash and cash equivalents, which represents a $31.7 million increase in unrestricted cash and cash equivalents from December 31, 2020. Our principal uses of cash for the three months ended March 31, 2021 were investment in land and land development, construction of homes, mortgage loan originations, investment in joint ventures, operating expenses, short-term working capital, and debt service requirements, including the repayment of amounts outstanding under our credit facilities. In order to fund these uses of cash, we used proceeds from home deliveries, the sale of mortgage loans and the sale of mortgage servicing rights, as well as excess cash balances, borrowings under our credit facilities, and other sources of liquidity.
The Company is a party to three primary credit agreements: (1) a $500 million unsecured revolving credit facility, dated July 18, 2013, as amended (the “Credit Facility”), with M/I Homes, Inc. as borrower and guaranteed by the Company’s wholly owned homebuilding subsidiaries; (2) a $125 million secured mortgage warehousing agreement (which increased to $185 million from November 15, 2020 to February 4, 2021), dated June 24, 2016, as amended, with M/I Financial as borrower (the “MIF Mortgage Warehousing Agreement”); and (3) a $90 million mortgage repurchase agreement, dated October 30, 2017, as amended, with M/I Financial as borrower (the “MIF Mortgage Repurchase Facility”).
As of March 31, 2021, there were no borrowings outstanding and $66.7 million of letters of credit outstanding under our $500 million Credit Facility, leaving $433.3 million available. We expect to continue managing our balance sheet and liquidity carefully by managing our spending on land acquisition and development and construction of inventory homes, as well as overhead expenditures, relative to our ongoing volume of home deliveries, and we expect to meet our current and anticipated capital requirements from cash receipts, excess cash balances and availability under our Credit Facility.
During the first quarter of 2021, we delivered 2,019 homes, started 2,294 homes, and spent $92.4 million on land purchases and $71.2 million on land development. We are selectively acquiring and developing lots in our markets to replenish our lot supply and will continue to monitor market conditions and our pace of home sales and deliveries and adjust our land spending accordingly. Pursuant to our land option agreements, as of March 31, 2021, we had a total of 25,219 lots under contract, with an aggregate purchase price of approximately $919.6 million, to be acquired during the remainder of 2021 through 2028.
Operating Cash Flow Activities. During the three-month period ended March 31, 2021, we generated $75.2 million of cash from operating activities, compared to using $24.2 million of cash in operating activities during the first quarter of 2020. The cash generated from operating activities in the first quarter of 2021 was primarily a result of net income of $84.9 million, $9.8 million of proceeds from the sale of mortgage loans net of mortgage loan originations, and an increase in accounts payable, other liabilities and customer deposits totaling $42.4 million, offset, in part, by a $34.3 million increase in inventory and a decrease in accrued compensation of $27.3 million. The $24.2 million of cash used in operating activities in 2020's first quarter was primarily a result of a $45.1 million increase in inventory, an increase in other assets of $20.5 million, and a decrease in accrued compensation of $27.0 million, offset by a net income of $31.7 million and an increase in accounts payable and customer deposits totaling $35.9 million.
Investing Cash Flow Activities. During the first quarter of 2021, we generated $0.6 million of cash from investing activities, compared to using $6.5 million of cash in investing activities during the first quarter of 2020. This increase in cash generated was primarily due to an increase in proceeds from the sale of a portion of our mortgage servicing rights of $4.4 million and return of capital from joint venture arrangements of $1.1 million in the first quarter of 2021, partially offset by a $4.7 million increase in our investment in joint venture arrangements. Our cash used during the first quarter of 2020 was primarily due to our increased investment in joint venture arrangements during the period.
Financing Cash Flow Activities. During the three months ended March 31, 2021, we used $43.7 million of cash from financing activities, compared to generating $45.9 million of cash during the first three months of 2020. The cash used in financing activities in 2021 was primarily due to repayments of $49.4 million (net of proceeds from borrowings) under our two M/I Financial credit facilities during the first quarter of 2021. The cash generated from financing activities in 2020 was primarily due to the issuance of our $400.0 million aggregate principal amount of 4.95% Senior Notes due 2028 (the “2028 Senior Notes”), net of debt issue costs, for $393.9 million, offset partially by the redemption of all $300.0 million of our then outstanding 2021 Senior Notes, and repayments of $59.1 million (net of proceeds from borrowings) under our Credit Facility during the first quarter of 2020.
On August 14, 2018, the Company announced that its Board of Directors authorized a share repurchase program (the “2018 Repurchase Program”) pursuant to which the Company may purchase up to $50 million of its outstanding common shares (see Note 12 to our financial statements). The Company did not repurchase any common shares during the first quarter of 2021. As of March 31, 2021, the Company is authorized to repurchase an additional $17.2 million of outstanding common shares under the 2018 Share Repurchase Program.
At March 31, 2021 and December 31, 2020, our ratio of homebuilding debt to capital was 32% and 34%, respectively, calculated as the carrying value of our outstanding homebuilding debt (which consists of borrowings under our Credit Facility, our 2028 Senior Notes, our 2025 Senior Notes, and Notes Payable- Other) divided by the sum of the carrying value of our outstanding homebuilding debt plus shareholders’ equity. We believe that this ratio provides useful information for understanding our financial position and the leverage employed in our operations, and for comparing us with other homebuilders.
We fund our operations with cash flows from operating activities, including proceeds from home deliveries, land sales and the sale of mortgage loans. We believe that these sources of cash, along with our balance of unrestricted cash and borrowings available under our credit facilities, will be sufficient to fund our currently anticipated working capital needs, investment in land and land development, construction of homes, operating expenses, planned capital spending, and debt service requirements for at least the next twelve months. In addition, we routinely monitor current and anticipated operational and debt service requirements, financial market conditions, and credit relationships, and we may choose to seek additional capital by issuing new debt and/or equity securities or engaging in other financial transactions to strengthen our liquidity or our long-term capital structure. The financing needs of our homebuilding and financial services operations depend on anticipated sales volume in the current year as well as future years, inventory levels and related turnover, forecasted land and lot purchases, debt maturity dates, and other factors. If we seek such additional capital or engage in such other financial transactions, there can be no assurance that we would be able to obtain such additional capital or consummate such other financial transactions on terms acceptable to us, if at all, and such additional equity or debt financing or other financial transactions could dilute the interests of our existing shareholders, add operational limitations and/or increase our interest costs.
Included in the table below is a summary of our available sources of cash from the Credit Facility, the MIF Mortgage Warehousing Agreement and the MIF Mortgage Repurchase Facility as of March 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Expiration
Date
|
Outstanding
Balance
|
Available
Amount
|
|
Notes payable – homebuilding (a)
|
(a)
|
$
|
—
|
|
$
|
433,256
|
|
|
Notes payable – financial services (b)
|
(b)
|
$
|
176,204
|
|
$
|
38,796
|
|
(a)The available amount under the Credit Facility is computed in accordance with the borrowing base calculation under the Credit Facility, which applies various advance rates for different categories of inventory and totaled $1.05 billion of availability for additional senior debt at March 31, 2021. As a result, the full $500 million commitment amount of the facility was available, less any borrowings and letters of credit outstanding. There were no borrowings outstanding and $66.7 million of letters of credit outstanding at March 31, 2021, leaving $433.3 million available. The Credit Facility has an expiration date of July 18, 2023 for $475.0 million of commitments and July 18, 2021 for $25.0 million of commitments.
(b)The available amount is computed in accordance with the borrowing base calculations under the MIF Mortgage Warehousing Agreement and the MIF Mortgage Repurchase Facility, each of which may be increased by pledging additional mortgage collateral, not to exceed the maximum aggregate commitment amount of M/I Financial’s warehousing agreements, which was $215 million as of March 31, 2021. The MIF Mortgage Warehousing Agreement has an expiration date of May 28, 2021 and the MIF Mortgage Repurchase Facility has an expiration date of October 25, 2021.
Notes Payable - Homebuilding.
Homebuilding Credit Facility. The Credit Facility provides for an aggregate commitment amount of $500 million, and also includes an accordion feature pursuant to which the maximum borrowing availability may be increased to an aggregate of $600 million, subject to obtaining additional commitments from lenders. The Credit Facility matures on July 18, 2023 for $475.0 million of commitments and July 18, 2021 for $25.0 million of commitments. Interest on amounts borrowed under the Credit Facility is payable at a rate which is adjusted daily and is equal to the sum of one-month LIBOR (subject to a floor of 0.75%) plus a margin of 250 basis points (subject to adjustment in subsequent quarterly periods based on the Company’s leverage ratio).
Borrowings under the Credit Facility constitute senior, unsecured indebtedness and availability is subject to, among other things, a borrowing base calculated using various advance rates for different categories of inventory. The Credit Facility also provides for a $125 million sub-facility for letters of credit. The Credit Facility contains various representations, warranties and covenants which require, among other things, that the Company maintain (1) a minimum level of Consolidated Tangible Net Worth of $848.2 million (subject to increase over time based on earnings and proceeds from equity offerings), (2) a leverage ratio not in excess of 60%, and (3) either a minimum Interest Coverage Ratio of 1.5 to 1.0 or a minimum amount of available liquidity. In addition, the Credit Facility contains covenants that limit the Company’s number of unsold housing units and model homes, as well as the amount of Investments in Unrestricted Subsidiaries and Joint Ventures (each as defined in the Credit Facility).
The Company’s obligations under the Credit Facility are guaranteed by all of the Company’s subsidiaries, with the exception of subsidiaries that are primarily engaged in the business of mortgage financing, title insurance or similar financial businesses relating to the homebuilding and home sales business, certain subsidiaries that are not 100%-owned by the Company or another subsidiary, and other subsidiaries designated by the Company as Unrestricted Subsidiaries (as defined in the indentures), subject to limitations on the aggregate amount invested in such Unrestricted Subsidiaries. The guarantors for the Credit Facility are the same subsidiaries that guarantee our the 2028 Senior Notes and our $250.0 million aggregate principal amount of 5.625% Senior Notes due 2025 (the “2025 Senior Notes”).
As of March 31, 2021, the Company was in compliance with all covenants of the Credit Facility, including financial covenants. The following table summarizes the most significant restrictive covenant thresholds under the Credit Facility and our compliance with such covenants as of March 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Covenant
|
|
Covenant Requirement
|
|
Actual
|
|
|
|
(Dollars in millions)
|
|
Consolidated Tangible Net Worth
|
≥
|
$
|
848.2
|
|
|
$
|
1,261.6
|
|
|
Leverage Ratio
|
≤
|
0.60
|
|
0.24
|
|
Interest Coverage Ratio
|
≥
|
1.5 to 1.0
|
|
11.8 to 1.0
|
|
Investments in Unrestricted Subsidiaries and Joint Ventures
|
≤
|
$
|
378.5
|
|
|
$
|
0.5
|
|
|
Unsold Housing Units and Model Homes
|
≤
|
2,983
|
|
|
528
|
|
Notes Payable - Financial Services.
MIF Mortgage Warehousing Agreement. The MIF Mortgage Warehousing Agreement is used to finance eligible residential mortgage loans originated by M/I Financial. The MIF Mortgage Warehousing Agreement provides a maximum borrowing availability of $125 million, which increased to $185 million from November 15, 2020 to February 4, 2021, which is a period of expected increases in the volume of mortgage originations. The MIF Mortgage Warehousing Agreement expires on May 28, 2021. Interest on amounts borrowed under the MIF Mortgage Warehousing Agreement is payable at a per annum rate equal to the one-month LIBOR rate (subject to a floor of 1.0%) plus a spread of 200 basis points.
As is typical for similar credit facilities in the mortgage origination industry, at closing, the expiration of the MIF Mortgage Warehousing Agreement was set at approximately one year and is under consideration for extension annually by the participating lenders. We expect to extend the MIF Mortgage Warehousing Agreement on or prior to the current expiration date of May 28, 2021, but we cannot provide any assurance that we will be able to obtain such an extension.
The MIF Mortgage Warehousing Agreement is secured by certain mortgage loans originated by M/I Financial that are being “warehoused” prior to their sale to investors. The MIF Mortgage Warehousing Agreement provides for limits with respect to certain loan types that can secure outstanding borrowings. There are currently no guarantors of the MIF Mortgage Warehousing Agreement.
As of March 31, 2021, there was $102.2 million outstanding under the MIF Mortgage Warehousing Agreement and M/I Financial was in compliance with all covenants thereunder. The financial covenants, as more fully described and defined in the MIF Mortgage Warehousing Agreement, are summarized in the following table, which also sets forth M/I Financial’s compliance with such covenants as of March 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Covenant
|
|
Covenant Requirement
|
|
Actual
|
|
|
|
(Dollars in millions)
|
|
Leverage Ratio
|
≤
|
10.0 to 1.0
|
|
4.0 to 1.0
|
|
Liquidity
|
≥
|
$
|
6.25
|
|
|
$
|
33.1
|
|
|
Adjusted Net Income
|
>
|
$
|
0.0
|
|
|
$
|
41.5
|
|
|
Tangible Net Worth
|
≥
|
$
|
12.5
|
|
|
$
|
51.6
|
|
MIF Mortgage Repurchase Facility. The MIF Mortgage Repurchase Facility is used to finance eligible residential mortgage loans originated by M/I Financial and is structured as a mortgage repurchase facility. The MIF Mortgage Repurchase Facility provides for a maximum borrowing availability of $90 million. The MIF Mortgage Repurchase Facility expires on October 25, 2021. M/I Financial pays interest on each advance under the MIF Mortgage Repurchase Facility at a per annum rate equal to the one-month LIBOR rate (subject to a floor of 1.0%) plus 175 or 200 basis points depending on the loan type. As is typical for similar credit facilities in the mortgage origination industry, at closing, the expiration of the MIF Mortgage Repurchase Facility was set at approximately one year.
The covenants in the MIF Mortgage Repurchase Facility are substantially similar to the covenants in the MIF Mortgage Warehousing Agreement. The MIF Mortgage Repurchase Facility provides for limits with respect to certain loan types that can secure outstanding borrowings, which are substantially similar to the restrictions in the MIF Mortgage Warehousing Agreement. There are no guarantors of the MIF Mortgage Repurchase Facility. As of March 31, 2021, there was $74.0 million outstanding under the MIF Mortgage Repurchase Facility. M/I Financial was in compliance with all financial covenants under the MIF Mortgage Repurchase Facility as of March 31, 2021.
Senior Notes.
4.95% Senior Notes. On January 22, 2020, the Company issued $400 million aggregate principal amount of 4.95% Senior Notes due 2028. The 2028 Senior Notes contain certain covenants, as more fully described and defined in the indenture governing the 2028 Senior Notes, which limit the ability of the Company and the restricted subsidiaries to, among other things: incur additional indebtedness; make certain payments, including dividends, or repurchase any shares, in an aggregate amount exceeding our “restricted payments basket”; make certain investments; and create or incur certain liens, consolidate or merge with or into other companies, or liquidate or sell or transfer all or substantially all of our assets. These covenants are subject to a number of exceptions and qualifications as described in the indenture governing the 2028 Senior Notes. As of March 31, 2021, the Company was in compliance with all terms, conditions, and covenants under the indenture.
5.625% Senior Notes. In August 2017, the Company issued $250 million aggregate principal amount of 5.625% Senior Notes due 2025. The 2025 Senior Notes contain certain covenants, as more fully described and defined in the indenture governing the 2025 Senior Notes, which limit the ability of the Company and the restricted subsidiaries to, among other things: incur additional indebtedness; make certain payments, including dividends, or repurchase any shares, in an aggregate amount exceeding our “restricted payments basket”; make certain investments; and create or incur certain liens, consolidate or merge with or into other companies, or liquidate or sell or transfer all or substantially all of our assets. These covenants are subject to a number of exceptions and qualifications as described in the indenture governing the 2025 Senior Notes. As of March 31, 2021, the Company was in compliance with all terms, conditions, and covenants under the indenture.
See Note 8 to our financial statements for more information regarding the 2028 Senior Notes and the 2025 Senior Notes.
Supplemental Financial Information.
As of March 31, 2021, M/I Homes, Inc. had $400.0 million aggregate principal amount of its 2028 Senior Notes and $250.0 million aggregate principal amount of its 2025 Senior Notes outstanding.
The 2028 Senior Notes and the 2025 Senior Notes are fully and unconditionally guaranteed, on a joint and several basis, by all of M/I Homes, Inc.’s subsidiaries (the “Subsidiary Guarantors”) with the exception of subsidiaries that are primarily engaged in the business of mortgage financing, title insurance or similar financial businesses relating to the homebuilding and home sales business, certain subsidiaries that are not 100%-owned by M/I Homes, Inc. or another subsidiary, and other subsidiaries
designated as Unrestricted Subsidiaries (as defined in the indentures governing the 2028 Senior Notes and the 2025 Senior Notes), subject to limitations on the aggregate amount invested in such Unrestricted Subsidiaries in accordance with the terms of the Credit Facility and the indentures governing the 2028 Senior Notes and the 2025 Senior Notes (the “Non-Guarantor Subsidiaries”). The Subsidiary Guarantors of the 2028 Senior Notes, the 2025 Senior Notes and the Credit Facility are the same and are listed on Exhibit 22 to this Form 10Q.
Each Subsidiary Guarantor is a direct or indirect 100%-owned subsidiary of M/I Homes, Inc. The guarantees are senior unsecured obligations of each Subsidiary Guarantor and rank equally in right of payment with all existing and future unsecured senior indebtedness of such Subsidiary Guarantor. The guarantees are effectively subordinated to any existing and future secured indebtedness of such Subsidiary Guarantor with respect to any assets comprising security or collateral for such indebtedness.
The guarantees are “full and unconditional,” as those terms are used in Regulation S-X, Rule 3-10(b)(3), except that the indentures governing the 2028 Senior Notes and the 2025 Senior Notes provide that a Subsidiary Guarantor’s guarantee will be released if: (1) all of the assets of such Subsidiary Guarantor have been sold or otherwise disposed of in a transaction in compliance with the terms of the applicable indenture; (2) all of the Equity Interests (as defined in the applicable indenture) held by M/I Homes, Inc. and the Restricted Subsidiaries (as defined in the applicable Indenture) of such Subsidiary Guarantor have been sold or otherwise disposed of to any person other than M/I Homes, Inc. or a Restricted Subsidiary in a transaction in compliance with the terms of the applicable indenture; (3) the Subsidiary Guarantor is designated an Unrestricted Subsidiary (or otherwise ceases to be a Restricted Subsidiary (including by way of liquidation or merger)) in compliance with the terms of the applicable indenture; (4) M/I Homes, Inc. exercises its legal defeasance option or covenant defeasance option under the applicable indenture; or (5) all obligations under the applicable indenture are discharged in accordance with the terms of the applicable indenture.
The enforceability of the obligations of the Subsidiary Guarantors under their guarantees may be subject to review under applicable federal or state laws relating to fraudulent conveyance or transfer, voidable preference and similar laws affecting the rights of creditors generally. In certain circumstances, a court could void the guarantees, subordinate amounts owing under the guarantees or order other relief detrimental to the holders of the 2028 Senior Notes and the 2025 Senior Notes.
The following tables present summarized financial information on a combined basis for M/I Homes, Inc. and the Subsidiary Guarantors. Transactions between M/I Homes, Inc. and the Subsidiary Guarantors have been eliminated and the summarized financial information does not reflect M/I Homes, Inc.’s or the Subsidiary Guarantors’ investment in, and equity in earnings from, the Non-Guarantor Subsidiaries.
Summarized Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
As of March 31, 2021
|
As of December 31, 2020
|
|
Assets:
|
|
|
|
Cash
|
$
|
276,662
|
|
$
|
223,284
|
|
|
Investment in joint venture arrangements
|
$
|
33,656
|
|
$
|
33,764
|
|
|
Amounts due from Non-Guarantor Subsidiaries
|
$
|
2,714
|
|
$
|
2,073
|
|
|
Total assets
|
$
|
2,445,221
|
|
$
|
2,343,936
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
|
|
Total liabilities
|
$
|
1,154,741
|
|
$
|
1,133,884
|
|
|
Shareholders’ equity
|
$
|
1,290,480
|
|
$
|
1,210,052
|
|
Summarized Statement of Income Data
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
(In thousands)
|
March 31, 2021
|
|
Revenues
|
$
|
799,127
|
|
|
Land and housing costs
|
$
|
626,585
|
|
|
Selling, general and administrative expense
|
$
|
81,495
|
|
|
Income before income taxes
|
$
|
90,814
|
|
|
Net income
|
$
|
69,546
|
|
Weighted Average Borrowings. For the three months ended March 31, 2021 and 2020, our weighted average borrowings outstanding were $707.9 million and $768.1 million, respectively, with a weighted average interest rate of 5.72% and 6.17%, respectively. The decrease in our weighted average borrowings and our weighted average interest rate related to decreased borrowings under our Credit Facility during the first quarter of 2021 compared to the same period in 2020.
At both March 31, 2021 and December 31, 2020, we had no borrowings outstanding under the Credit Facility. Based on our currently anticipated spending on home construction, overhead expenses, land acquisition and development during the remainder of 2021, offset by expected cash receipts from home deliveries, we may borrow under the Credit Facility during 2021, but do not expect the peak amount outstanding to exceed $100 million. The actual amount borrowed (and the estimated peak amount outstanding) during the remainder of 2021 and the related timing will be subject to numerous factors, which are subject to significant variation as a result of the timing and amount of land and house construction expenditures, payroll and other general and administrative expenses, and cash receipts from home deliveries. The amount borrowed will also be impacted by other cash receipts and payments, any capital markets transactions or other additional financings by the Company, any repayments or redemptions of outstanding debt, any share repurchases under the 2018 Share Repurchase Program and any other extraordinary events or transactions, including the uncertain effects of the COVID-19 pandemic. The Company may also experience significant variation in cash and Credit Facility balances from week to week due to the timing of such receipts and payments.
There were $66.7 million of letters of credit issued and outstanding under the Credit Facility at March 31, 2021. During the three months ended March 31, 2021, the average daily amount of letters of credit outstanding under the Credit Facility was $61.9 million and the maximum amount of letters of credit outstanding under the Credit Facility was $66.7 million.
At March 31, 2021, M/I Financial had $102.2 million outstanding under the MIF Mortgage Warehousing Agreement. During the three months ended March 31, 2021, the average daily amount outstanding under the MIF Mortgage Warehousing Agreement was $11.7 million and the maximum amount outstanding was $168.1 million, which occurred during January 2021, while the temporary increase provision was in effect and the maximum borrowing availability was $185.0 million.
At March 31, 2021, M/I Financial had $74.0 million outstanding under the MIF Mortgage Repurchase Facility. During the three months ended March 31, 2021, the average daily amount outstanding under the MIF Mortgage Repurchase Facility was $42.6 million and the maximum amount outstanding was $74.0 million, which occurred during March 2021.
Universal Shelf Registration. In June 2019, the Company filed a $400 million universal shelf registration statement with the SEC, which registration statement became effective upon filing and will expire in June 2022. Pursuant to the registration statement, the Company may, from time to time, offer debt securities, common shares, preferred shares, depositary shares, warrants to purchase debt securities, common shares, preferred shares, depositary shares or units of two or more of those securities, rights to purchase debt securities, common shares, preferred shares or depositary shares, stock purchase contracts and units. The timing and amount of offerings, if any, will depend on market and general business conditions.
CONTRACTUAL OBLIGATIONS
There have been no material changes to our contractual obligations appearing in the Contractual Obligations section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2020 Form 10-K.
OFF-BALANCE SHEET ARRANGEMENTS
Notes 3, 5 and 6 to our Condensed Consolidated Financial Statements discuss our off-balance sheet arrangements with respect to land acquisition contracts and option agreements, and land development joint ventures, including the nature and amounts of financial obligations relating to these items. In addition, these Notes discuss the nature and amounts of certain types of commitments that arise in the ordinary course of our land development and homebuilding operations, including commitments of land development joint ventures for which we might be obligated.
Our off-balance sheet arrangements relating to our homebuilding operations include joint venture arrangements, land option agreements, guarantees and indemnifications associated with acquiring and developing land, and the issuance of letters of credit and completion bonds. Our use of these arrangements is for the purpose of securing the most desirable lots on which to build homes for our homebuyers in a manner that we believe reduces the overall risk to the Company. Additionally, in the ordinary course of its business, M/I Financial issues guarantees and indemnities relating to the sale of loans to third parties.
Land Option Agreements. In the ordinary course of business, the Company enters into land option or purchase agreements for which we generally pay non-refundable deposits. Pursuant to these land option agreements, the Company provides a deposit to
the seller as consideration for the right to purchase land at different times in the future, usually at predetermined prices. In accordance with Accounting Standards Codification 810-10 Consolidation (“ASC 810”), we analyze our land option or purchase agreements to determine whether the corresponding land sellers are variable interest entities (“VIE”) and, if so, whether we are the primary beneficiary. Although we do not have legal title to the optioned land, ASC 810 requires a company to consolidate a VIE if the company is determined to be the primary beneficiary. In cases where we are the primary beneficiary, even though we do not have title to such land, we are required to consolidate these purchase/option agreements and reflect such assets and liabilities as Consolidated Inventory not Owned in our Unaudited Condensed Consolidated Balance Sheets. At both March 31, 2021 and December 31, 2020, we have concluded that we were not the primary beneficiary of any VIEs from which we are purchasing under land option or purchase agreements.
In addition, we evaluate our land option or purchase agreements to determine for each contract if (1) a portion or all of the purchase price is a specific performance requirement, or (2) the amount of deposits and prepaid acquisition and development costs have exceeded certain thresholds relative to the remaining purchase price of the lots. If either is the case, then the remaining purchase price of the lots (or the specific performance amount, if applicable) is recorded as an asset and liability in Consolidated Inventory Not Owned on our Consolidated Balance Sheets.
At March 31, 2021, “Consolidated Inventory Not Owned” was $12.1 million. At March 31, 2021, the corresponding liability of $12.1 million has been classified as Obligation for Consolidated Inventory Not Owned on our Unaudited Condensed Consolidated Balance Sheets.
Other than the Consolidated Inventory Not Owned balance, the Company currently believes that its maximum exposure as of March 31, 2021 related to our land option agreements is equal to the amount of the Company’s outstanding deposits and prepaid acquisition costs, which totaled $65.0 million, including cash deposits of $42.6 million, prepaid acquisition costs of $11.3 million, letters of credit of $8.0 million and $3.1 million of other non-cash deposits.
Letters of Credit and Completion Bonds. The Company provides standby letters of credit and completion bonds for development work in progress, deposits on land and lot purchase agreements and miscellaneous deposits. As of March 31, 2021, the Company had outstanding $284.4 million of completion bonds and standby letters of credit, some of which were issued to various local governmental entities, that expire at various times through November 2027. Included in this total are: (1) $210.8 million of performance and maintenance bonds and $58.4 million of performance letters of credit that serve as completion bonds for land development work in progress; (2) $8.4 million of financial letters of credit; and (3) $6.8 million of financial bonds. The development agreements under which we are required to provide completion bonds or letters of credit are generally not subject to a required completion date and only require that the improvements are in place in phases as houses are built and sold. In locations where development has progressed, the amount of development work remaining to be completed is typically less than the remaining amount of bonds or letters of credit due to timing delays in obtaining release of the bonds or letters of credit.
Guarantees and Indemnities. In the ordinary course of business, M/I Financial enters into agreements that guarantee purchasers of its mortgage loans that M/I Financial will repurchase a loan if certain conditions occur. The risks associated with these guarantees are offset by the value of the underlying assets, and the Company accrues its best estimate of the probable loss on these loans. Additionally, the Company has provided certain other guarantees and indemnities in connection with the acquisition and development of land by our homebuilding operations. See Note 5 to our Condensed Consolidated Financial Statements for additional details relating to our guarantees and indemnities.
INTEREST RATES AND INFLATION
Our business is significantly affected by general economic conditions within the United States and, particularly, by the impact of interest rates and inflation. Inflation can have a long-term impact on us because increasing costs of land, materials and labor can result in a need to increase the sales prices of homes. In addition, inflation is often accompanied by higher interest rates, which can have a negative impact on housing demand and the costs of financing land development activities and housing construction. Higher interest rates also may decrease our potential market by making it more difficult for homebuyers to qualify for mortgages or to obtain mortgages at interest rates that are acceptable to them. The impact of increased rates can be offset, in part, by offering variable rate loans with lower interest rates. In conjunction with our mortgage financing services, hedging methods are used to reduce our exposure to interest rate fluctuations between the commitment date of the loan and the time the loan closes. Rising interest rates, as well as increased materials and labor costs, may reduce gross margins. An increase in material and labor costs is particularly a problem during a period of declining home prices. Conversely, deflation can impact the value of real estate and make it difficult for us to recover our land costs. Therefore, either inflation or deflation could adversely impact our future results of operations.