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 156,200 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; Ft. Myers/Naples, Tampa, Sarasota and Orlando, Florida; Austin, Dallas/Fort Worth, Houston and San Antonio, Texas; Charlotte and Raleigh, North Carolina; and Nashville, Tennessee.
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; 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, 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, 2023 (the “2023 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 2023 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 June 30, 2024 as compared to those disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2023 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:
| | | | | | |
| Northern | Southern | |
| Chicago, Illinois | Ft. Myers/Naples, Florida | |
| Cincinnati, Ohio | Orlando, Florida | |
| Columbus, Ohio | Sarasota, Florida | |
| Indianapolis, Indiana | Tampa, Florida | |
| Minneapolis/St. Paul, Minnesota | Austin, Texas | |
| Detroit, Michigan | Dallas/Fort Worth, Texas | |
| Houston, Texas | |
| San Antonio, Texas | |
| Charlotte, North Carolina | |
| Raleigh, North Carolina | |
| Nashville, Tennessee | |
Overview
We generated strong results during the first half of 2024. For the quarter ended June 30, 2024, we achieved all-time quarterly records in gross margin, income before income taxes, net income and diluted earnings per share and a second quarter record for revenue. In addition, our homes delivered increased 12% and our new contracts for the second quarter of 2024 increased 3% compared to the second quarter of 2023. Our performance reflects favorable demographic trends and rising household formations, which led to improvements in homebuyer demand, despite elevated and volatile mortgage interest rates that continued to challenge housing affordability. Homebuyers continued to demonstrate a strong desire for homeownership in an environment that was also impacted by an undersupply of new and resale homes. We also had strong cash flow and ended the quarter with ample liquidity and low leverage.
We achieved the following results during the second quarter and first half of 2024 in comparison to the second quarter and first half of 2023:
•Revenue increased 9% to $1.11 billion (a second quarter record) and 7% to $2.16 billion (a year-to-date record), respectively;
•Number of homes delivered increased 12% to 2,224 homes (our second highest level for the second quarter) and increased 10% to 4,382 homes (a year-to-date record), respectively;
•Gross margins improved 240 basis points to 27.9% (an all-time quarterly record) and 300 basis points to 27.5%, respectively;
•Income before income taxes increased 25% to $194.1 million (an all-time quarterly record) and 29% to $374.4 million (an all-time year-to-date record), respectively;
•Income before income taxes as a percentage of revenue increased by 220 basis points to 17.5% (an all-time quarterly record) and 290 basis points to 17.4% (an all-time year-to-date record), respectively;
•Net income increased 24% to $146.7 million (an all-time quarterly record) and 29% to $284.8 million (an all-time year-to-date record), respectively;
•New contracts increased 3% to 2,255 from 2,197 and 10% to 4,802 from 4,368 (second highest year-to-date level in Company history), respectively;
•Shareholders’ equity of $2.74 billion (a record high);
•Book value per common share increased to a record high $100 per share; and
•Homebuilding debt to capital ratio was 20%.
In addition to the results described above, our financial services operations also achieved all-time record quarterly revenues and strong income before income taxes for the first half of 2024, benefiting from higher margins and an increase in loans originated.
Our company-wide absorption pace of sales per community for the second quarter of 2024 declined slightly to 3.5 per month compared to 3.7 per month for the prior year’s second quarter as a result of the limited lot supply in the increased number of our communities in closeout status. We plan to open additional new communities during 2024 and increase our average community count by approximately 5% from 2023.
Summary of Company Financial Results
Income before income taxes for the second quarter of 2024 increased 25% from $155.4 million in the second quarter of 2023 to an all-time quarterly record $194.1 million in 2024. We also achieved all-time quarterly record net income of $146.7 million, or $5.12 per diluted share, in 2024's second quarter, compared to net income of $118.0 million, or $4.12 per diluted share, in 2023's second quarter. Our effective tax rate was 24.4% in 2024’s second quarter compared to 24.0% in 2023. Income before income taxes increased from $291.3 million in the first half of 2023 to $374.4 million in the first half of 2024, an all-time year-to-date record. We achieved all-time year-to-date record net income of $284.8 million, or $9.90 per diluted share, during 2024's first half compared to net income of $221.1 million, or $7.77 per diluted share, in the six months ended June 30, 2023. Our effective tax rate was 23.9% in 2024's first half compared to 24.1% in the same period in 2023.
During the quarter ended June 30, 2024, we achieved record second quarter total revenue of $1.11 billion, of which $1.07 billion was from homes delivered, $7.0 million was from land sales and $30.8 million was from our financial services operations. Revenue from homes delivered increased 9% in 2024's second quarter compared to the same period in 2023 driven primarily by a 12% increase in the number of homes delivered (234 units), offset partially by a 2% decrease in the average sales price of homes delivered ($11,000 per home delivered). Revenue from land sales decreased $1.6 million from the second quarter of 2023 due to fewer land sales in the current year compared to the prior year. Revenue from our financial services segment increased 22% to an all-time quarterly record $30.8 million in the second quarter of 2024 as a result of higher margins on and an increase in loans sold during the period compared to the second quarter of 2023, partially offset by a decrease in the average loan amount. For the first half of 2024, we recorded year-to-date record total revenue of $2.16 billion, of which $2.09 billion was from homes delivered, $10.2 million was from land sales and $57.7 million was from our financial services operations. Revenue from homes delivered increased 7% in the first half of 2024 compared to the same period in 2023 driven primarily by a 10% increase in the number of homes delivered (385 units), partially offset by a 2% decrease in the average sales price of homes delivered ($12,000 per home delivered). Revenue from land sales increased $1.4 million from the six months ended June 30, 2023 due to increased land sales in 2024's first six months compared to the prior year. Revenue from our financial services segment increased 14% to $57.7 million in the first half of 2024 as a result of higher margins on loans sold during the period compared to the first half of 2023 and an increase in loans sold during the period, partially offset by a decrease in the average loan amount compared to the first half of 2023.
Total gross margin (total revenue less total land and housing costs) increased $51.1 million in the second quarter of 2024 compared to the second quarter of 2023 as a result of a $45.6 million improvement in the gross margin of our homebuilding operations (housing gross margin and land sales gross margin) and a $5.5 million increase 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 $44.6 million and our housing gross margin percentage improved by 210 basis points to 25.8% from 23.7%. The improvement in gross margin primarily resulted from the 12% increase in homes delivered, and our improvement in gross margin percentage was primarily due to the mix of homes being delivered. Our housing gross margin may fluctuate from quarter to quarter depending on the mix of communities delivering homes due to the variation in margin between different communities. Our gross margin on land sales (land sale gross margin) increased $1.0 million in the second quarter of 2024 compared to the second quarter of 2023 as a result of the mix of lots sold in the current year compared to the prior year. The gross margin of our financial services operations increased $5.5 million in the second quarter of 2024 compared to the second quarter of 2023 as a result of higher margins on and an increased number of loans sold, and an increase in the number of loan originations, offset partially by a decrease in the average loan amount during the second quarter of 2024 compared to the second quarter of 2023. Total gross margin increased $99.8 million in the first half of 2024 compared to the same period in 2023 as a result of a $92.7 million improvement in the gross margin of our homebuilding operations in addition to a $7.1 million improvement in the gross margin of our financial services operations. With respect to our homebuilding gross margin, our gross margin on homes delivered improved $90.3 million and our housing gross margin percentage improved 290 basis points from 22.6% in prior year’s first half to 25.5% in 2024's first half. These increases are primarily due to the 10% increase in the number of homes delivered primarily due to the mix of homes delivered, offset partially by the 2% decrease in the average sales price of homes delivered. Our gross margin on land sales improved $2.4 million in 2024's first six months compared to the same period in 2023. The gross margin of our financial services operations increased $7.1 million in the first half of 2024 compared to the same period in 2023 as a result of higher margins on, an increased number of loans sold during the first half of 2024 compared to the first half of 2023, and an increase in the number of loan originations, partially offset by a decrease in the average loan amount.
We opened 38 new communities during the first half of 2024 and closed 40 communities. 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. The mix of communities delivering homes may cause fluctuations in our new contracts, absorption pace and housing gross margin from year to year.
For the three months ended June 30, 2024, selling, general and administrative expense increased $15.0 million, and increased as a percentage of revenue from 10.6% in the second quarter of 2023 to 11.0% in the second quarter of 2024. Selling expense increased $6.6 million from 2023's second quarter and increased as a percentage of revenue to 5.3% in 2024's second quarter from 5.1% for the same period in 2023. Variable selling expense for sales commissions contributed $3.8 million to the increase due to the higher number of homes delivered as well as higher co-op rates during the period compared to prior year. Non-variable selling expense increased $2.8 million primarily as a result of increased costs associated with our sales offices and models due to our increase in community count from prior year. General and administrative expense increased $8.4 million compared to the second quarter of 2023 and increased as a percentage of revenue from 5.5% in the second quarter of 2023 to 5.8% in the second quarter of 2024. The increase in general and administrative expense was primarily due to a $6.7 million increase in compensation-related expenses, a $0.6 million increase in land-related expenses, a $0.6 million increase in computer costs, a $0.3 million increase in advertising expenses, and a $0.2 million increase in miscellaneous expenses. For the six months ended June 30, 2024, selling, general and administrative expense increased $24.9 million, and increased as a percentage of revenue from 10.3% in the six months ended June 30, 2023 to 10.8% in the first six months of 2024. Selling expense increased $11.5 million from the first half of 2023 and increased as a percentage of revenue to 5.2% in 2024's first half from 5.0% for the same period in 2023. Variable selling expense for sales commissions contributed $7.7 million to the increase due to the higher number of homes delivered during the first half of 2024 and higher co-op rates during the period compared to prior year. Non-variable selling expense increased $3.8 million primarily as a result of increased costs associated with our sales offices and models due to our increase in community count from prior year. General and administrative expense increased $13.4 million compared to the first half of 2023 and increased as a percentage of revenue from 5.3% in the six months ended June 30, 2023 to 5.6% in the first six months of 2024. The increase in general and administrative expense was primarily due to a $9.3 million increase in compensation-related expenses, a $1.3 million increase in computer costs, a $1.2 million increase in land-related expenses, a $0.3 million increase in professional fees, and a $1.3 million increase in miscellaneous expenses.
Outlook
Housing market conditions improved during the second quarter of 2024 compared to the same period in 2023. However, the housing market remains subject to unpredictability as a result of uncertainty regarding the near-term direction of mortgage interest rates as well as various macroeconomic conditions, including labor and material costs and availability, inflation, and the economic concerns of our potential homebuyers. The extent to which these factors will impact our business is unpredictable. We believe that we are well positioned to manage through these economic conditions with our affordable product offerings, land position and planned new community openings. We remain sensitive to potential changes in market conditions, and continue to focus on controlling overhead leverage, carefully managing our investment in land and land development spending and selectively offering homebuyer concessions, such as mortgage interest rate buydowns, to support homebuyers, drive order activity and minimize cancellations. Our strong balance sheet and ample liquidity should also provide us with flexibility through changing economic conditions. However, we cannot provide any assurances that the strategic business objectives listed below will remain successful, and we may need to adjust elements of our strategy to effectively address evolving market conditions.
We expect to emphasize the following strategic business objectives throughout the remainder of 2024:
•managing our land spend and inventory levels;
•continued focus on cycle times;
•opening new communities;
•managing overhead spend;
•maintaining a strong balance sheet and liquidity levels; and
•emphasizing customer service, product quality and design, and premier locations.
During the first six months of 2024, we invested $226.8 million in land acquisitions and $263.9 million in land development compared to $141.7 million and $201.3 million, respectively, during the first six months of 2023. We invested in more land acquisitions in the first half of 2024 compared to the second quarter of 2023 in line with the land supply needs of our divisions. We continue to closely review our land acquisition and land development spending and monitor our ongoing pace of home sales and deliveries, and we will adjust our land and investment spend accordingly.
We ended the second quarter of 2024 with approximately 49,500 lots under control, which represents an approximately six-year supply of lots based on the past twelve months of homes delivered, including certain lots that we anticipate selling to third parties. This represents a 20% increase from our approximately 41,300 lots under control at the end of last year’s second quarter.
We opened 38 communities and closed 40 communities in the first half of 2024, ending the second quarter with 211 active communities, compared to 195 at the end of last year’s second quarter. Although the timing of opening new communities and closing existing communities is subject to substantial variation, we expect to grow our average community count by approximately 5% by the end of 2024.
The following table shows, by segment: revenue; gross margin; selling, general and administrative expense; operating income (loss); and interest (income) expense - net for the three and six months ended June 30, 2024 and 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | Six Months Ended June 30, | |
| (In thousands) | 2024 | | 2023 | | | 2024 | | 2023 | |
| Revenue: | | | | | | | | | |
| Northern homebuilding | $ | 464,781 | | | $ | 383,886 | | | | $ | 873,301 | | | $ | 766,616 | | |
| Southern homebuilding | 614,238 | | | 604,861 | | | | 1,225,459 | | | 1,197,380 | | |
Financial services (a) | 30,762 | | | 25,266 | | | | 57,724 | | | 50,547 | | |
| Total revenue | $ | 1,109,781 | | | $ | 1,014,013 | | | | $ | 2,156,484 | | | $ | 2,014,543 | | |
| | | | | | | | | |
| Gross margin: | | | | | | | | | |
| Northern homebuilding | $ | 106,951 | | | $ | 76,489 | | | | $ | 195,760 | | | $ | 142,989 | | |
| Southern homebuilding | 171,567 | | | 156,429 | | | | 339,139 | | | 299,274 | | |
Financial services (a) | 30,762 | | | 25,266 | | | | 57,724 | | | 50,547 | | |
| Total gross margin | $ | 309,280 | | | $ | 258,184 | | | | $ | 592,623 | | | $ | 492,810 | | |
| | | | | | | | | |
| Selling, general and administrative expense: | | | | | | | | | |
| Northern homebuilding | $ | 34,130 | | | $ | 29,636 | | | | $ | 64,878 | | | $ | 56,976 | | |
| Southern homebuilding | 51,817 | | | 46,517 | | | | 101,546 | | | 91,750 | | |
Financial services (a) | 12,879 | | | 11,523 | | | | 24,654 | | | 21,836 | | |
| Corporate | 23,663 | | | 19,849 | | | | 41,435 | | | 37,003 | | |
| Total selling, general and administrative expense | $ | 122,489 | | | $ | 107,525 | | | | $ | 232,513 | | | $ | 207,565 | | |
| | | | | | | | | |
| Operating income (loss): | | | | | | | | | |
| Northern homebuilding | $ | 72,821 | | | $ | 46,853 | | | | $ | 130,882 | | | $ | 86,013 | | |
| Southern homebuilding | 119,750 | | | 109,912 | | | | 237,593 | | | 207,524 | | |
Financial services (a) | 17,883 | | | 13,743 | | | | 33,070 | | | 28,711 | | |
| Less: Corporate selling, general and administrative expense | (23,663) | | | (19,849) | | | | (41,435) | | | (37,003) | | |
| Total operating income | $ | 186,791 | | | $ | 150,659 | | | | $ | 360,110 | | | $ | 285,245 | | |
| | | | | | | | | |
| Interest (income) expense - net: | | | | | | | | | |
| Northern homebuilding | $ | (56) | | | $ | (47) | | | | $ | (136) | | | $ | (93) | | |
| Southern homebuilding | — | | | (203) | | | | (398) | | | (205) | | |
Financial services (a) | 3,483 | | | 2,584 | | | | 6,358 | | | 4,911 | | |
| Corporate | (10,775) | | | (7,004) | | | | (20,092) | | | (10,672) | | |
Total interest income - net of interest expense | $ | (7,348) | | | $ | (4,670) | | | | $ | (14,268) | | | $ | (6,059) | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Other income | — | | | (28) | | | | — | | | (35) | | |
| | | | | | | | | |
| Income before income taxes | $ | 194,139 | | | $ | 155,357 | | | | $ | 374,378 | | | $ | 291,339 | | |
(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 homebuyers, with the exception of a small amount of mortgage refinancing.
The following tables show total assets by segment at June 30, 2024 and December 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| At June 30, 2024 |
| (In thousands) | Northern | | Southern | | Corporate, Financial Services and Unallocated | | Total |
| Deposits on real estate under option or contract | $ | 11,003 | | | $ | 51,943 | | | $ | — | | | $ | 62,946 | |
Inventory (a) | 1,020,600 | | | 1,854,918 | | | — | | | 2,875,518 | |
| Investments in joint venture arrangements | — | | | 46,180 | | | — | | | 46,180 | |
| Other assets | 48,208 | | | 149,437 | | (b) | 1,157,781 | | | 1,355,426 | |
| Total assets | $ | 1,079,811 | | | $ | 2,102,478 | | | $ | 1,157,781 | | | $ | 4,340,070 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2023 |
| (In thousands) | Northern | | Southern | | Corporate, Financial Services and Unallocated | | Total |
| Deposits on real estate under option or contract | $ | 8,990 | | | $ | 42,618 | | | $ | — | | | $ | 51,608 | |
Inventory (a) | 1,016,982 | | | 1,728,561 | | | — | | | 2,745,543 | |
| Investments in joint venture arrangements | — | | | 44,011 | | | — | | | 44,011 | |
| Other assets | 37,171 | | | 104,306 | | (b) | 1,039,801 | | | 1,181,278 | |
| Total assets | $ | 1,063,143 | | | $ | 1,919,496 | | | $ | 1,039,801 | | | $ | 4,022,440 | |
(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 and six months ended June 30, 2024 and 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | Six Months Ended June 30, | |
| (Dollars in thousands) | 2024 | | 2023 | | | 2024 | | 2023 | |
| Northern Region | | | | | | | | | |
| Homes delivered | 951 | | | 783 | | | | 1,794 | | | 1,580 | | |
| New contracts, net | 1,002 | | | 949 | | | | 2,164 | | | 1,777 | | |
| Backlog at end of period | 1,618 | | | 1,253 | | | | 1,618 | | | 1,253 | | |
| Average sales price of homes delivered | $ | 489 | | | $ | 490 | | | | $ | 486 | | | $ | 485 | | |
| Average sales price of homes in backlog | $ | 527 | | | $ | 504 | | | | $ | 527 | | | $ | 504 | | |
| Aggregate sales value of homes in backlog | $ | 852,472 | | | $ | 630,985 | | | | $ | 852,472 | | | $ | 630,985 | | |
| Housing revenue | $ | 464,606 | | | $ | 383,486 | | | | $ | 872,126 | | | $ | 766,116 | | |
| Land sale revenue | $ | 175 | | | $ | 400 | | | | $ | 1,175 | | | $ | 500 | | |
Operating income homes (a) | $ | 72,705 | | | $ | 46,857 | | | | $ | 130,361 | | | $ | 86,013 | | |
Operating income (loss) land | $ | 116 | | | $ | (4) | | | | $ | 521 | | | $ | — | | |
| Number of average active communities | 97 | | | 102 | | | | 98 | | | 101 | | |
| Number of active communities, end of period | 92 | | | 100 | | | | 92 | | | 100 | | |
| Southern Region | | | | | | | | | |
| Homes delivered | 1,273 | | | 1,207 | | | | 2,588 | | | 2,417 | | |
| New contracts, net | 1,253 | | | 1,248 | | | | 2,638 | | | 2,591 | | |
| Backlog at end of period | 1,804 | | | 2,255 | | | | 1,804 | | | 2,255 | | |
| Average sales price of homes delivered | $ | 477 | | | $ | 494 | | | | $ | 470 | | | $ | 492 | | |
| Average sales price of homes in backlog | $ | 538 | | | $ | 509 | | | | $ | 538 | | | $ | 509 | | |
| Aggregate sales value of homes in backlog | $ | 970,214 | | | $ | 1,146,672 | | | | $ | 970,214 | | | $ | 1,146,672 | | |
| Housing revenue | $ | 607,438 | | | $ | 596,712 | | | | $ | 1,216,431 | | | $ | 1,189,028 | | |
| Land sale revenue | $ | 6,800 | | | $ | 8,149 | | | | $ | 9,028 | | | $ | 8,352 | | |
Operating income homes (a) | $ | 117,933 | | | $ | 109,016 | | | | $ | 234,868 | | | $ | 206,635 | | |
Operating income (loss) land | $ | 1,817 | | | $ | 896 | | | | $ | 2,725 | | | $ | 889 | | |
| Number of average active communities | 118 | | | 96 | | | | 116 | | | 96 | | |
| Number of active communities, end of period | 119 | | | 95 | | | | 119 | | | 95 | | |
| Total Homebuilding Regions | | | | | | | | | |
| Homes delivered | 2,224 | | | 1,990 | | | | 4,382 | | | 3,997 | | |
| New contracts, net | 2,255 | | | 2,197 | | | | 4,802 | | | 4,368 | | |
| Backlog at end of period | 3,422 | | | 3,508 | | | | 3,422 | | | 3,508 | | |
| Average sales price of homes delivered | $ | 482 | | | $ | 493 | | | | $ | 477 | | | $ | 489 | | |
| Average sales price of homes in backlog | $ | 533 | | | $ | 507 | | | | $ | 533 | | | $ | 507 | | |
| Aggregate sales value of homes in backlog | $ | 1,822,686 | | | $ | 1,777,657 | | | | $ | 1,822,686 | | | $ | 1,777,657 | | |
| Housing revenue | $ | 1,072,044 | | | $ | 980,198 | | | | $ | 2,088,557 | | | $ | 1,955,144 | | |
| Land sale revenue | $ | 6,975 | | | $ | 8,549 | | | | $ | 10,203 | | | $ | 8,852 | | |
Operating income homes (a) | $ | 190,638 | | | $ | 155,873 | | | | $ | 365,229 | | | $ | 292,648 | | |
Operating income land | $ | 1,933 | | | $ | 892 | | | | $ | 3,246 | | | $ | 889 | | |
| Number of average active communities | 215 | | | 198 | | | | 214 | | | 197 | | |
| Number of active communities, end of period | 211 | | | 195 | | | | 211 | | | 195 | | |
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(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 June 30, | | Six Months Ended June 30, |
| (Dollars in thousands) | 2024 | | 2023 | | 2024 | | 2023 |
| Financial Services | | | | | | | |
| Number of loans originated | 1,618 | | | 1,281 | | | 3,174 | | | 2,539 | |
| Value of loans originated | $ | 639,155 | | | $ | 515,533 | | | $ | 1,240,101 | | | $ | 1,009,994 | |
| | | | | | | |
| Revenue | $ | 30,762 | | | $ | 25,266 | | | $ | 57,724 | | | $ | 50,547 | |
| Less: Selling, general and administrative expenses | 12,879 | | | 11,523 | | | 24,654 | | | 21,836 | |
| Less: Interest expense | 3,483 | | | 2,584 | | | 6,358 | | | 4,911 | |
| | | | | | | |
| Income before income taxes | $ | 14,400 | | | $ | 11,159 | | | $ | 26,712 | | | $ | 23,800 | |
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 of communities between periods.
Cancellation Rates
The following table sets forth the cancellation rates for each of our homebuilding segments for the three and six months ended June 30, 2024 and 2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
| Northern | 9.3 | % | | 9.1 | % | | 8.2 | % | | 9.9 | % |
| Southern | 10.2 | % | | 11.4 | % | | 9.7 | % | | 12.7 | % |
| | | | | | | |
| Total cancellation rate | 9.8 | % | | 10.4 | % | | 9.0 | % | | 11.6 | % |
Seasonality
Typically, our homebuilding operations experience significant seasonality and quarter-to-quarter variability in homebuilding activity levels. In general, homes delivered increase 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.
Year Over Year Comparison
Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023
Northern Region. During the three months ended June 30, 2024, homebuilding revenue in our Northern region increased $80.9 million, from $383.9 million in the second quarter of 2023 to $464.8 million in the second quarter of 2024. This 21% increase in homebuilding revenue was primarily the result of a 21% increase in the number of homes delivered (168 more units), which was primarily the result of the mix of homes being delivered. Operating income in our Northern region increased $25.9 million from $46.9 million in the second quarter of 2023 to $72.8 million during the quarter ended June 30, 2024. This increase in operating income was the result of a $30.5 million improvement in our gross margin offset partially by a $4.5 million increase in selling, general and administrative expense. With respect to our homebuilding gross margin, our housing gross margin improved $30.3 million and our housing gross margin percentage improved 310 basis points to 23.0% in the second quarter of 2024 from 19.9% in the prior year’s second quarter. These improvements were primarily due to the increase in the number of homes delivered in addition to the mix of homes delivered compared to prior year. Our land sale gross margin improved $0.1 million in the second quarter of 2024 compared to the same period in 2023 as a result of the mix of lots sold in the current year compared to the prior year.
Selling, general and administrative expense increased $4.5 million, from $29.6 million for the quarter ended June 30, 2023 to $34.1 million for the quarter ended June 30, 2024 but improved as a percentage of revenue to 7.3% in 2024's second quarter from 7.7% in 2023's second quarter. The increase in selling, general and administrative expense was attributable to a $3.3 million increase in selling expense primarily due to a $3.0 million increase in variable selling expenses resulting from increases in sales commissions produced by the higher number of homes delivered as well as a $0.3 million increase in non-variable selling expense primarily as a result of increased costs associated with our sales offices and models. This increase in selling, general and administrative expense was also attributable to a $1.2 million increase in general and administrative expense, which was primarily related to a $0.7 million increase in compensation-related expenses and $0.5 million increase in land related expenses.
During the three months ended June 30, 2024, we experienced a 6% increase in new contracts in our Northern region, from 949 in the second quarter of 2023 to 1,002 in the second quarter of 2024. Homes in backlog increased 29% from 1,253 homes at
June 30, 2023 to 1,618 homes at June 30, 2024. The increases in new contracts and backlog were primarily a result of improved demand compared to prior year. Average sales price in backlog increased to $527,000 at June 30, 2024 compared to $504,000 at June 30, 2023 primarily due to the mix of homes being sold. During the second quarter of 2024, we opened three new communities in our Northern region compared to nine during the second quarter of 2023. The decrease was a result of delays in approvals for entitlements and permits, and longer development timelines, all of which delayed community openings during the period. Our monthly absorption rate in our Northern region improved to 3.5 per community in the second quarter of 2024 compared to 3.1 per community in 2023's second quarter due to increased availability of and demand for inventory homes.
Southern Region. During the three month period ended June 30, 2024, homebuilding revenue in our Southern region increased $9.3 million, from $604.9 million in the second quarter of 2023 to $614.2 million in the second quarter of 2024. This 2% increase in homebuilding revenue was the result of a 5% increase in the number of homes delivered (66 more units) due to increased availability of inventory homes, offset partially by a 3% decrease in the average sales price of homes delivered ($17,000 per home delivered), which was primarily due to mix. Operating income in our Southern region increased $9.9 million from $109.9 million in the second quarter of 2023 to $119.8 million during the quarter ended June 30, 2024. This increase in operating income was the result of a $15.1 million improvement in our gross margin, offset partially by a $5.3 million increase in selling, general, and administrative expense. With respect to our homebuilding gross margin, our housing gross margin improved $14.2 million, due primarily to the increase in the number of homes delivered during the period and the mix of homes being delivered compared to prior year, offset partially by the decrease in the average sales price of homes delivered. Our housing gross margin percentage improved from 26.1% in prior year’s second quarter to 27.9% in the second quarter of 2024, primarily due to the mix of homes being delivered. Our land sale gross margin improved $0.9 million in the second quarter of 2024 compared to the second quarter of 2023 as a result of the mix of lots sold in the current year compared to the prior year.
Selling, general and administrative expense increased $5.3 million from $46.5 million in the second quarter of 2023 to $51.8 million in the second quarter of 2024 and increased as a percentage of revenue to 8.4% from 7.7% in the second quarter of 2023. The increase in selling, general and administrative expense was attributable to a $2.9 million increase in selling expense primarily due to a $0.8 million increase in variable selling expenses resulting from increases in sales commissions produced by the higher number of homes delivered as well as a $2.1 million increase in non-variable selling expense primarily as a result of increased costs associated with our sales offices and models due to our increased community count. This increase in selling, general and administrative expense was also attributable to a $2.4 million increase in general and administrative expense, which was due to a $1.9 million increase in compensation-related expenses, a $0.2 million increase in land-related expenses, and a $0.3 million increase in miscellaneous expenses.
During the three months ended June 30, 2024, our new contracts increased slightly in our Southern region, from 1,248 in the second quarter of 2023 to 1,253 in the second quarter of 2024, which was primarily due to our increased community count compared to prior year. Homes in backlog decreased, however, by 20% from 2,255 homes at June 30, 2023 to 1,804 homes at June 30, 2024, primarily as a result of improved construction cycle times allowing us to deliver homes in backlog at a faster rate compared to last year and increased availability of inventory homes compared to prior year. Average sales price in backlog increased to $538,000 at June 30, 2024 from $509,000 at June 30, 2023 primarily due to the mix of homes being sold. During the three months ended June 30, 2024, we opened 14 new communities in our Southern region compared to opening six communities during 2023's second quarter. Our monthly absorption rate in our Southern region declined to 3.5 per community in the second quarter of 2024 compared to 4.4 per community in the second quarter of 2023 as a result of the limited lot supply in the increased number of our communities in closeout status.
Financial Services. Revenue from our mortgage and title operations increased 22% to an all-time quarterly record $30.8 million in the second quarter of 2024 from $25.3 million in the second quarter of 2023 due to higher margins on loans sold during the period compared to prior year’s second quarter and a 26% increase in the number of loan originations from 1,281 in 2023's second quarter to 1,618 in the second quarter of 2024, partially offset by a decrease in the average loan amount from $402,000 in the quarter ended June 30, 2023 to $395,000 in the quarter ended June 30, 2024.
Our financial services segment experienced a $4.1 million increase in operating income in the second quarter of 2024 compared to 2023's second quarter, which was primarily due to the increase in revenue discussed above offset, in part, by a $1.4 million increase in selling, general and administrative expense compared to the second quarter of 2023, which was primarily the result of an increase in compensation-related expenses.
At June 30, 2024, M/I Financial provided financing services in all of our markets. Approximately 87% of our homes delivered during the second quarter of 2024 were financed through M/I Financial, compared to 81% in the second quarter of 2023. Capture rate is influenced by financing availability and competition in the mortgage market and can fluctuate from quarter to quarter.
Corporate Selling, General and Administrative Expense. Corporate selling, general and administrative expense increased $3.9 million from $19.8 million for the second quarter of 2023 to $23.7 million for the second quarter of 2024. This increase primarily resulted from a $2.2 million increase in compensation-related expenses and a $1.2 million increase in miscellaneous expenses.
Interest Income, net of Interest Expense. The Company earned $7.3 million of interest income - net for the three months ended June 30, 2024 compared to earning $4.7 million of interest income - net for the three months ended June 30, 2023. This increase was primarily due to a higher average cash balance on hand compared to prior year.
Income Taxes. Our overall effective tax rate was 24.4% for the three months ended June 30, 2024 and 24.0% for the three months ended June 30, 2023. The increase in the effective tax rate from the three months ended June 30, 2023 was primarily attributable to a $0.7 million decrease in tax benefit from equity compensation in 2024.
Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023
Northern Region. During the first half of 2024, homebuilding revenue in our Northern region increased $106.7 million, from $766.6 million in the first six months of 2023 to $873.3 million in the first six months of 2024. This 14% increase in homebuilding revenue was primarily the result of a 14% increase in the number of homes delivered (214 more units) due to the mix of homes delivered, in addition to a $0.7 million increase in land sale revenue and a slight increase in the average sales price of homes delivered ($1,000 per home delivered). Operating income in our Northern region increased $44.9 million, from $86.0 million during the first half of 2023 to $130.9 million during the six months ended June 30, 2024. The increase in operating income was primarily the result of a $52.8 million increase in our gross margin offset partially by a $7.9 million increase in selling, general and administrative expense. With respect to our homebuilding gross margin, our housing gross margin improved $52.3 million, and our housing gross margin percentage improved 370 basis points from 18.7% in the first six months of 2023 to 22.4% for the same period in 2024, primarily due to the mix of homes being delivered in addition to the increase in the number of homes delivered. Our land sale gross margin improved $0.5 million in the first half of 2024 compared to the same period in 2023 as a result of the mix of lots sold in the current year compared to the prior year.
Selling, general and administrative expense increased $7.9 million, from $57.0 million for the six months ended June 30, 2023 to $64.9 million for the six months ended June 30, 2024, but remained flat as a percentage of revenue at 7.4% for both periods. The increase in selling, general and administrative expense was attributable to a $6.2 million increase in selling expense, primarily attributable to a $5.5 million increase in variable selling expenses resulting from increases in sales commissions produced by the higher number of homes delivered and an $0.7 million increase in costs associated with our sales offices and models. The increase in selling, general and administrative expense was also attributable to a $1.7 million increase in general and administrative expense, which was primarily related to a $1.0 million increase in compensation-related expenses and $0.7 million increase in other miscellaneous expenses.
During the six months ended June 30, 2024, we experienced a 22% increase in new contracts in our Northern region, from 1,777 in the six months ended June 30, 2023 to 2,164 in the first half of 2024. Homes in backlog increased 29% from 1,253 at June 30, 2023 to 1,618 homes at June 30, 2024. The increase in new contracts and homes in backlog was primarily due to improved demand. Average sales price in backlog increased to $527,000 at June 30, 2024 compared to $504,000 at June 30, 2023 primarily due to the mix of homes being sold. During the six months ended June 30, 2024, we opened 10 new communities in our Northern region compared to 20 new communities opened during the first half of 2023. The decrease was a result of delays in approvals for entitlements and permits, and longer development timelines, all of which delayed community openings during the period. Our monthly absorption rate in our Northern region improved to 3.7 per community in the six months ended June 30, 2024 from 2.9 per community in the same period in 2023 as a result of increased availability of and demand for inventory homes.
Southern Region. During the six months ended June 30, 2024, homebuilding revenue in our Southern region increased $28.1 million from $1.20 billion in the first half of 2023 to $1.23 billion in the first half of 2024. This 2% increase in homebuilding revenue was the result of a 7% increase in the number of homes delivered (171 more units) due to increased availability of inventory homes and improved construction cycle times on our backlog homes and a $0.7 million increase in land sale revenue, offset partially by a 4% decrease in the average sales price of homes delivered ($22,000 per home delivered) primarily due to the mix of homes delivered. Operating income in our Southern region increased 14% from $207.5 million in the first half of 2023 to $237.6 million during the six months ended June 30, 2024. This increase in operating income was the result of a $39.9 million improvement in our gross margin, offset partially by a $9.8 million increase in selling, general, and administrative expense. With respect to our homebuilding gross margin, our gross margin on homes delivered improved $38.0 million, due primarily to the increase in the number of homes delivered during the period as well as due to the mix of homes delivered, offset partially by the decrease in average sale price of homes delivered. Our housing gross margin
percentage improved 260 basis points from 25.1% in the six months ended June 30, 2023 to 27.7% in the same period in 2024 primarily due to mix, offset partially by the decrease in average sales price of homes delivered compared to prior year. Our land sale gross margin improved $1.9 million in the first half of 2024 compared to the same period in 2023 as a result of the mix of lots sold in the current year compared to the prior year.
Selling, general and administrative expense increased $9.8 million from $91.8 million in the first half of 2023 to $101.6 million in the first half of 2024 and increased as a percentage of revenue to 8.3% compared to 7.7% in 2023’s same period. The increase in selling, general and administrative expense was attributable to a $4.8 million increase in selling expense primarily due to a $2.2 million increase in variable selling expenses resulting from increases in sales commissions produced by the higher number of homes delivered and a $2.6 million increase in non-variable selling expenses primarily related to costs associated with our sales offices and models due to our increased community count. The increase in selling, general and administrative expense was also attributable to a $5.0 million increase in general and administrative expense, which was primarily related to a $3.3 million increase in compensation-related expenses due to our strong financial performance during the period, a $0.9 million increase in land-related expenses, and a $0.8 million increase in other miscellaneous expenses.
During the six months ended June 30, 2024, we experienced a 2% increase in new contracts in our Southern region, from 2,591 in the six months ended June 30, 2023 to 2,638 in the first half of 2024 primarily due to the increase in our average number of communities compared to prior year. Homes in backlog decreased 20% from 2,255 homes at June 30, 2023 to 1,804 homes at June 30, 2024 due primarily to improved construction cycle times allowing us to deliver homes in backlog at a faster rate compared to last year in addition to increased availability of inventory homes compared to prior year. Average sales price in backlog increased from $509,000 at June 30, 2023 to $538,000 at June 30, 2024 primarily due to the mix of homes delivered. During the six months ended June 30, 2024, we opened 28 communities in our Southern region, compared to opening 14 during the first half of 2023. Our monthly absorption rate in our Southern region declined to 3.8 per community in the first half of 2024 from 4.5 per community in the first half of 2023 as a result of the limited lot supply in the increased number of our communities in closeout status.
Financial Services. Revenue from our mortgage and title operations increased 14% from $50.5 million in the first half of 2023 to $57.7 million in the first half of 2024 due to higher margins on loans sold during the period compared to 2023's first half, proceeds from the sale of mortgage servicing rights, and a 25% increase in the number of loan originations from 2,539 in the first half of 2023 to 3,174 in the first half of 2024, offset partially by a decrease in the average loan amount from $398,000 in the six months ended June 30, 2023 to $391,000 in the six months ended June 30, 2024.
Our financial services segment experienced a $4.4 million increase in operating income in the first half of 2024 compared to the same period in 2023, which was primarily due to the increase in revenue discussed above, partially offset by a $2.8 million increase in selling, general and administrative expense compared to the first half of 2023. The increase in selling, general and administrative expense was primarily attributable to a $1.7 million increase in compensation related expenses, a $0.5 million increase in indemnification reserves during the period, and a $0.6 million increase in other miscellaneous expenses.
At June 30, 2024, M/I Financial provided financing services in all of our markets. Approximately 88% of our homes delivered during the first half of 2024 were financed through M/I Financial, compared to 79% during the six months ended June 30, 2023. 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 $37.0 million for the six months ended June 30, 2023 to $41.4 million for the six months ended June 30, 2024, primarily due to a $2.3 million increase in compensation-related expenses, a $0.8 million increase in computer-related costs, a $0.8 million increase in advertising expenses, and a $0.5 million increase in miscellaneous expenses incurred during the period.
Interest Income, net of Interest Expense. The Company earned $14.3 million of interest income - net for the six months ended June 30, 2024 compared to incurring $6.1 million of interest expense - net for the six months ended June 30, 2023. This was primarily due to a higher average cash balance on hand compared to prior year.
Income Taxes. Our overall effective tax rate was 23.9% for the six months ended June 30, 2024 and 24.1% for the six months ended June 30, 2023. The decrease in the effective rate from the six months ended June 30, 2023 was primarily attributable to a $0.6 million increase in tax benefit from equity compensation in 2024.
LIQUIDITY AND CAPITAL RESOURCES
Overview of Capital Resources and Liquidity.
At June 30, 2024, we had $837.5 million of cash, cash equivalents and restricted cash, with $837.3 million of this amount comprised of unrestricted cash and cash equivalents, which represents a $104.7 million increase in unrestricted cash and cash equivalents from December 31, 2023. The increase in cash is primarily due to house closings, the timing of land spend compared to prior year as well as a larger beginning of year balance on hand. Our principal uses of cash for the six months ended June 30, 2024 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, and the repurchase of $75.6 million of our outstanding common shares under both the 2021 and 2024 Share Repurchase Programs (as defined below). In order to fund these uses of cash, we used proceeds from home deliveries, the sale of mortgage loans, the sale of mortgage servicing rights, excess cash balances, borrowings under our MIF Mortgage Repurchase Facility (as defined below), and other sources of liquidity.
The Company is a party to two primary credit agreements: (1) a $650 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; and (2) a $300 million (subject to increases and decreases during certain periods) mortgage repurchase agreement, dated October 24, 2023, with M/I Financial as borrower (the “MIF Mortgage Repurchase Facility”).
As of June 30, 2024, we had outstanding notes payable (consisting primarily of notes payable for our financial services operations, the 2030 Senior Notes and the 2028 Senior Notes) with varying maturities in an aggregate principal amount of $922.8 million, with $222.8 million payable within 12 months. Future interest payments associated with these notes payable totaled $150.5 million as of June 30, 2024, with $31.9 million payable within 12 months.
As of June 30, 2024, there were no borrowings outstanding and $80.1 million of letters of credit outstanding under our $650 million Credit Facility, leaving $569.9 million available. We expect to continue managing our balance sheet and liquidity carefully in the remainder of 2024 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 cash requirements in 2024 from cash receipts, excess cash balances and availability under our credit facilities.
During the first half of 2024, we delivered 4,382 homes, started 4,868 homes, ended the quarter with 5,033 homes under construction compared to 4,506 at the end of last year’s second quarter, and spent $226.8 million on land purchases and $263.9 million on land development.
We are actively 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 June 30, 2024, we had a total of 26,148 lots under contract, with an aggregate purchase price of approximately $1.34 billion, to be acquired during the remainder of 2024 through 2029.
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. We use these arrangements to secure 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.
Operating Cash Flow Activities. During the six-month period ended June 30, 2024, we generated $143.3 million of cash from operating activities, compared to generating $417.7 million of cash from operating activities during the first half of 2023. The cash provided by operating activities in the first half of 2024 was primarily a result of net income of $284.8 million, and an increase of $86.6 million in accounts payable, customer deposits and other liabilities, offset, in part, by a $143.9 million increase in inventory purchases and payments for mortgage loan originations which exceeded the proceeds from the sale of mortgage loans by $54.4 million, and a decrease in accrued compensation totaling $25.4 million. The cash generated in operating activities during the first half of 2023 was primarily a result of net income of $221.1 million, $52.5 million of proceeds from the sale of mortgage loans net of mortgage loan originations, a $157.0 million decrease in inventory purchases due to delays and timing of land purchases and an increase of $36.1 million in accounts payable, offset, in part, by a decrease in accrued compensation and other liabilities totaling $60.2 million.
Investing Cash Flow Activities. During the first half of 2024, we used $27.5 million of cash in investing activities, compared to using $2.8 million of cash in investing activities during the first half of 2023. The cash used in investing activities in the first half of 2024 was primarily a result of a $29.0 million increase in our investment in joint venture arrangements and a
$5.8 million increase in property and equipment, offset, in part, by $7.2 million of proceeds from the sale of a portion of our mortgage servicing rights. The cash used in investing activities during the first half of 2023 was primarily a result of a $10.5 million increase in our investment in joint venture arrangements and a $2.1 million increase in property and equipment, offset, in part, by $9.8 million of proceeds from the sale of a portion of our mortgage servicing rights during the second quarter of 2023.
Financing Cash Flow Activities. During the six months ended June 30, 2024, we used $11.1 million of cash in financing activities, compared to using $58.1 million of cash in financing activities during the first six months of 2023. The cash used in financing activities in 2024 was primarily due to the repurchase of $75.6 million of our outstanding common shares during the first half of 2024, offset partially by proceeds from borrowings (net of repayments) under our MIF Mortgage Repurchase Facility of $56.9 million and $7.5 million in proceeds from the exercise of stock options during the first half of 2024. The cash used in financing activities in the first half of 2023 was primarily due to repayments of $59.3 million (net of proceeds from borrowings) under our two then-outstanding M/I Financial credit facilities and the repurchase of $15.2 million of our outstanding common shares during the first half of 2023, offset partially by the $16.6 million in proceeds from the exercise of stock options during the first half of 2023.
On May 13, 2024, the Company announced that its Board of Directors authorized a new share repurchase program pursuant to which the Company was permitted to purchase up to $250 million of its outstanding common shares (the “2024 Share Repurchase Program”), which replaced the 2021 Share Repurchase Program which had $95 million of remaining availability at the time. During the first half of 2024, the Company repurchased 0.6 million outstanding common shares for an aggregate purchase price of $75.6 million under both the 2021 and the 2024 Share Repurchase Programs which was funded with cash on hand. As of June 30, 2024, the Company is authorized to repurchase an additional $207.1 million of outstanding common shares under the 2024 Share Repurchase Program (see Note 12 to our financial statements for more information). Based on current market conditions, expected capital needs and availability, and the current market price of the Company’s common shares, we expect to continue repurchasing shares during the remainder of 2024. The timing and amount of any future purchases under the 2024 Share Repurchase Program will be based on a variety of factors, including the market price of the Company’s common shares, business considerations, general market and economic conditions and legal requirements.
At June 30, 2024 and December 31, 2023, our ratio of homebuilding debt to capital was 20% and 22%, respectively, calculated as the carrying value of our outstanding homebuilding debt (which consists of borrowings under our Credit Facility, our 2030 Senior Notes and our 2028 Senior Notes) 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 and home delivery 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 and the MIF Mortgage Repurchase Facility as of June 30, 2024:
| | | | | | | | | | | |
| (In thousands) | Expiration
Date | Outstanding
Balance | Available
Amount |
Notes payable – homebuilding (a) | (a) | $ | — | | $ | 569,909 | |
Notes payable – financial services (b) | (b) | $ | 222,792 | | $ | 47 | |
(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 $2.10 billion of availability for additional senior debt at June 30, 2024. As a result, the full $650 million commitment amount of the facility was available, less any borrowings and letters of credit outstanding. There were no borrowings outstanding and $80.1 million of letters of credit outstanding at June 30, 2024, leaving $569.9 million available. The Credit Facility has an expiration date of December 9, 2026.
(b)The available amount is computed in accordance with the borrowing base calculations under the MIF Mortgage Repurchase Facility, which may be increased by pledging additional mortgage collateral, not to exceed the maximum aggregate commitment amount of M/I Financial's repurchase agreement as of June 30, 2024, which was $240 million. The MIF Mortgage Repurchase Facility has an expiration date of October 22, 2024.
Notes Payable - Homebuilding.
Homebuilding Credit Facility. The Credit Facility provides for an aggregate commitment amount of $650 million and also includes an accordion feature pursuant to which the maximum borrowing availability may be increased to an aggregate of $800 million, subject to obtaining additional commitments from lenders. The Credit Facility matures on December 9, 2026. Interest on amounts borrowed under the Credit Facility is payable at multiple interest rate options, including one, three, or six month adjusted term secured overnight financing rate (“SOFR”) (subject to a floor of 0.25%) plus a margin of 175 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 $250 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 $1.67 billion at June 30, 2024 (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 Credit Facility), 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 2030 Senior Notes and our 2028 Senior Notes.
As of June 30, 2024, 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 June 30, 2024:
| | | | | | | | | | | | | | |
| Financial Covenant | | Covenant Requirement | | Actual |
| | (Dollars in millions) |
| Consolidated Tangible Net Worth | ≥ | $ | 1,666.1 | | | $ | 2,653.2 | |
| Leverage Ratio | ≤ | 0.60 | | (0.02) |
| Interest Coverage Ratio | ≥ | 1.5 to 1.0 | | 22.4 to 1.0 |
| Investments in Unrestricted Subsidiaries and Joint Ventures | ≤ | $ | 766.7 | | | $ | 6.4 | |
| Unsold Housing Units and Model Homes | ≤ | 3,067 | | | 1,450 | |
Notes Payable - Financial Services.
MIF Mortgage Repurchase Facility. The MIF Mortgage Repurchase Facility is used to finance eligible residential mortgage loans originated by M/I Financial. The MIF Mortgage Repurchase Facility provides for a maximum borrowing availability of $300 million (subject to increases and decreases during certain periods). The borrowing availability under the MIF Mortgage
Repurchase Facility is $240 million through September 17, 2024 and will increase to $270 million from September 18, 2024 until maturity. The MIF Mortgage Repurchase Facility expires on October 22, 2024. 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 and is under consideration for extension annually by the participating lenders. We expect to extend the MIF Mortgage Repurchase Facility on or prior to the current expiration date of October 22, 2024, but we cannot provide any assurance that we will be able to obtain such an extension.
M/I Financial pays interest on each advance under the MIF Mortgage Repurchase Facility at a per annum rate based on Daily Adjusting One-Month Term SOFR plus a margin as defined in the repurchase agreement. The MIF Mortgage Repurchase Facility provides for limits with respect to certain loan types that can secure outstanding borrowings. The MIF Mortgage Repurchase Facility also contains certain financial covenants each of which is defined in the repurchase agreement. There are no guarantors of the MIF Mortgage Repurchase Facility.
As of June 30, 2024, there was $223 million outstanding under the MIF Mortgage Repurchase Facility (which at the time had a maximum borrowing availability of $240 million), and M/I Financial was in compliance with all covenants thereunder. The financial covenants, as more fully described and defined in the MIF Mortgage Repurchase Facility, are summarized in the following table, which also sets forth M/I Financial’s compliance with such covenants as of June 30, 2024:
| | | | | | | | | | | | | | |
| Financial Covenant | | Covenant Requirement | | Actual |
| | (Dollars in millions) |
| Leverage Ratio | ≤ | 12.0 to 1.0 | | 5.3 to 1.0 |
| Liquidity | ≥ | $ | 10.0 | | | $ | 45.0 | |
| Adjusted Net Income | > | $ | 0.0 | | | $ | 22.1 | |
| Tangible Net Worth | ≥ | $ | 25.0 | | | $ | 45.1 | |
Senior Notes.
3.95% Senior Notes. On August 23, 2021, the Company issued $300.0 million aggregate principal amount of 3.95% Senior Notes due 2030. The 2030 Senior Notes contain certain covenants, as more fully described and defined in the indenture governing the 2030 Senior Notes, which limit the ability of the Company and the restricted subsidiaries to, among other things: incur certain liens securing indebtedness without equally and ratably securing the 2030 Senior Notes and the guarantees thereof; enter into certain sale and leaseback transactions; and consolidate or merge with or into other companies, liquidate or sell or otherwise dispose of all or substantially all of the Company’s assets. These covenants are subject to a number of exceptions and qualifications as described in the indenture governing the 2030 Senior Notes. As of June 30, 2024, the Company was in compliance with all terms, conditions, and covenants under the indenture.
4.95% Senior Notes. On January 22, 2020, the Company issued $400.0 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 June 30, 2024, 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 2030 Senior Notes and the 2028 Senior Notes. Supplemental Financial Information.
As of June 30, 2024, M/I Homes, Inc. had $300.0 million aggregate principal amount of its 2030 Senior Notes and $400.0 million aggregate principal amount of its 2028 Senior Notes outstanding.
The 2030 Senior Notes and the 2028 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 2030 Senior Notes and the 2028 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 2030 Senior Notes and the 2028 Senior Notes (the “Non-Guarantor Subsidiaries”). The Subsidiary Guarantors of the 2030 Senior Notes, the 2028 Senior Notes and the Credit Facility are the same.
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 2030 Senior Notes and the 2028 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 2030 Senior Notes and the 2028 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 June 30, 2024 | | As of December 31, 2023 |
| Assets: | | | | |
| Cash | | $ | 785,754 | | | $ | 695,810 | |
| Investment in joint venture arrangements | | $ | 40,139 | | | $ | 38,373 | |
| Amounts due from Non-Guarantor Subsidiaries | | $ | 12,145 | | | $ | 6,949 | |
| Total assets | | $ | 4,028,329 | | | $ | 3,769,713 | |
| | | | |
Liabilities and Shareholders’ Equity: | | | | |
| | | | |
| Total liabilities | | $ | 1,343,848 | | | $ | 1,306,433 | |
| Shareholders’ equity | | $ | 2,684,481 | | | $ | 2,463,280 | |
Summarized Statement of Income Data
| | | | | | |
| | Six Months Ended |
| (In thousands) | | June 30, 2024 |
| Revenues | | $ | 2,098,760 | |
| Land and housing costs | | $ | 1,563,861 | |
| Selling, general and administrative expense | | $ | 207,087 | |
| Income before income taxes | | $ | 348,438 | |
| Net income | | $ | 263,430 | |
Weighted Average Borrowings. For the three months ended June 30, 2024 and 2023, our weighted average borrowings outstanding were $718.7 million and $757.5 million, respectively, with a weighted average interest rate of 5.33% and 5.32%, respectively. The decrease in our weighted average borrowings related to decreased average borrowings under our M/I Financial credit facility during the second quarter of 2024 compared to the same period in 2023. The increase in our weighted average borrowing rate was due to higher interest rates on our credit facility in 2024 compared to the prior year.
At both June 30, 2024 and December 31, 2023, we had no borrowings outstanding under the Credit Facility. Based on our currently anticipated spending on home construction, overhead expenses and land acquisition and development during 2024, offset by expected cash receipts from home deliveries and other sources, we do not expect to incur borrowings under the Credit Facility during 2024. To the extent we elect to borrow under the Credit Facility during the remainder of 2024, the actual amount borrowed 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 additional share repurchases under the 2024 Share Repurchase Program and any other extraordinary events or transactions. 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 $80.1 million of letters of credit issued and outstanding under the Credit Facility at June 30, 2024. During the six months ended June 30, 2024, the average daily amount of letters of credit outstanding under the Credit Facility was $70.3 million and the maximum amount of letters of credit outstanding under the Credit Facility was $80.2 million.
At June 30, 2024, M/I Financial had $222.8 million outstanding under the MIF Mortgage Repurchase Facility. During the six months ended June 30, 2024, the average daily amount outstanding under the MIF Mortgage Repurchase Facility was $18.9 million and the maximum amount outstanding was $224.3 million, which occurred during March 2024.
Universal Shelf Registration. In June 2022, the Company filed a universal shelf registration statement with the SEC, which registration statement became effective upon filing and will expire in June 2025. 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.
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. These macroeconomic trends have pressured housing affordability, negatively impacted homebuyer sentiment and impacted the costs of financing land development activities and housing construction.
The annual rate of inflation in the United States was 3.0% in June 2024, as measured by the Consumer Price Index, down slightly from March 2024, and down significantly from 6.5% in December 2022 and 9.1% in June 2022 (which was the highest inflation rate experienced in 40 years). As the rate of inflation has declined from 2022’s historic levels, our costs have stabilized. However, continued increases in inflation rates could impact our costs, potentially reduce our gross margins, reduce the purchasing power of potential homebuyers, and negatively impact their ability and desire to buy a home.
Interest rates began to rise in the second half of 2023 from 6.5% at the end of 2022 to over 8% by the end of October 2023 (the highest rates since 2001). Rates declined slightly by the end of 2023 to approximately 7%, and have hovered around 7% throughout the first half of 2024. The higher mortgage interest rates are making it more difficult for homebuyers to qualify for mortgages or to obtain mortgages at interest rates that are acceptable to them. Rising interest rates, as well as increased materials and labor costs, can also reduce gross margins.