Item 7. Management’s Discussion and Analysis
ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
M/I Homes, Inc. and subsidiaries is one of the nation’s leading builders of single-family homes, having sold over 136,700 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; 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:
• Application of Critical Accounting Estimates and Policies;
• Results of Operations;
• Discussion of Our Liquidity and Capital Resources; and
• Impact of Interest Rates and Inflation.
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 “Forward - Looking Statements” above in Part I.
Listed below are those estimates and policies that we believe are critical and require the use of complex judgment in their application. Our critical accounting estimates should be read in conjunction with the Notes to our Consolidated Financial Statements.
Revenue Recognition. Revenue and the related profit from the sale of a home and revenue and the related profit from the sale of land to third parties are recognized in the financial statements on the date of closing if delivery has occurred, title has passed to the buyer, all performance obligations (as defined below) have been met, and control of the home or land is transferred to the buyer in an amount that reflects the consideration we expect to be entitled to receive in exchange for the home or land. If not received immediately upon closing, cash proceeds from home closings are held in escrow for the Company’s benefit, typically for up to three days, and are included in Cash, cash equivalents and restricted cash on the Consolidated Balance Sheets.
Sales incentives vary by type of incentive and by amount on a community-by-community and home-by-home basis. The costs of any sales incentives in the form of free or discounted products and services provided to homebuyers are reflected in Land and housing costs in the Consolidated Statements of Income because such incentives are identified in our home purchase contracts with homebuyers as an intrinsic part of our single performance obligation to deliver and transfer title to their home for the transaction price stated in the contracts. Sales incentives that we may provide in the form of closing cost allowances are recorded as a reduction of housing revenue at the time the home is delivered.
We record sales commissions within Selling expenses in the Consolidated Statements of Income when incurred (i.e., when the home is delivered) as the amortization period is generally one year or less and therefore capitalization is not required as part of the practical expedient for incremental costs of obtaining a contract.
Contract liabilities include customer deposits related to sold but undelivered homes. Substantially all of our home sales are scheduled to close and be recorded to revenue within one year from the date of receiving a customer deposit. Contract liabilities expected to be recognized as revenue, excluding revenue pertaining to contracts that have an original expected duration of one year or less, is not material.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance
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obligation is satisfied. All of our home purchase contracts have a single performance obligation as the promise to transfer the home is not separately identifiable from other promises in the contract and, therefore, not distinct. Our primary performance obligation, to deliver the agreed-upon home, is generally satisfied in less than one year from the original contract date. Deferred revenue resulting from any other uncompleted performance obligations existing at the time we deliver new homes to our homebuyers is not material.
Although our third party land sale contracts may include multiple performance obligations, the revenue we expect to recognize in any future year related to remaining performance obligations, excluding revenue pertaining to contracts that have an original expected duration of one year or less, is not material. We do not disclose the value of unsatisfied performance obligations for land sale contracts with an original expected duration of one year or less.
We recognize the majority of the revenue associated with our mortgage loan operations when the mortgage loans are sold and/or related servicing rights are sold to third party investors or retained and managed under a third party sub-service arrangement. The revenue recognized is reduced by the fair value of the related guarantee provided to the investor. The fair value of the guarantee is recognized in revenue when the Company is released from its obligation under the guarantee. We recognize financial services revenue associated with our title operations as homes are delivered, closing services are rendered, and title policies are issued, all of which generally occur simultaneously as each home is delivered. All of the underwriting risk associated with title insurance policies is transferred to third-party insurers.
See Note 1 to our Consolidated Financial Statements for additional information related to our revenues disaggregated by geography and revenue source.
Inventory. Inventory includes the costs of land acquisition, land development and home construction, capitalized interest, real estate taxes, direct overhead costs incurred during development and home construction, and common costs that benefit the entire community, less impairments, if any. Land acquisition, land development and common costs (both incurred and estimated to be incurred) are typically allocated to individual lots based on the total number of lots expected to be closed in each community or phase, or based on the relative fair value, the relative sales value or the front footage method of each lot. Any changes to the estimated total development costs of a community or phase are allocated proportionately to the homes remaining in the community or phase and homes previously closed. The cost of individual lots is transferred to homes under construction when home construction begins. Home construction costs are accumulated on a specific identification basis. Costs of home deliveries include the specific construction cost of the home and the allocated lot costs. Such costs are charged to cost of sales simultaneously with revenue recognition, as discussed above. When a home is closed, we typically have not yet paid all incurred costs necessary to complete the home. As homes close, we compare the home construction budget to actual recorded costs to date to estimate the additional costs to be incurred from our subcontractors related to the home. We record a liability and a corresponding charge to cost of sales for the amount we estimate will ultimately be paid related to that home. We monitor the accuracy of such estimates by comparing actual costs incurred in subsequent months to the estimate. Although actual costs to complete a home in the future could differ from our estimates, our method has historically produced consistently accurate estimates of actual costs to complete closed homes.
Inventory is recorded at cost, unless events and circumstances indicate that the carrying value of the land is impaired, at which point the inventory is written down to fair value as required by Accounting Standards Codification (“ASC”) 360-10, Property, Plant and Equipment (“ASC 360”). The Company assesses inventory for recoverability on a quarterly basis if events or changes in local or national economic conditions indicate that the carrying amount of an asset may not be recoverable. In conducting our quarterly review for indicators of impairment on a community level, we evaluate, among other things, margins on sales contracts in backlog, the margins on homes that have been delivered, expected changes in margins with regard to future home sales over the life of the community, expected changes in margins with regard to future land sales, the value of the land itself as well as any results from third-party appraisals. From the review of all of these factors, we identify communities whose carrying values may exceed their estimated undiscounted future cash flows and run a test for recoverability. For those communities whose carrying values exceed the estimated undiscounted future cash flows and which are deemed to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the communities exceeds the estimated fair value. Due to the fact that the Company’s cash flow models and estimates of fair values are based upon management estimates and assumptions, unexpected changes in market conditions and/or changes in management’s intentions with respect to the inventory may lead the Company to incur additional impairment charges in the future. Because each inventory asset is unique, there are numerous inputs and assumptions used in our valuation techniques, including estimated average selling price, construction and development costs, absorption pace (reflecting any product mix change strategies implemented or to be implemented), selling strategies, alternative land uses (including disposition of all or a portion of the land owned), or discount rates, which could materially impact future cash flow and fair value estimates.
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As of December 31, 2021, our projections generally assume a gradual improvement in market conditions. If communities are not recoverable based on estimated future undiscounted cash flows, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. The fair value of a community is estimated by discounting management’s cash flow projections using an appropriate risk-adjusted interest rate. As of December 31, 2021, we utilized discount rates ranging from 13% to 16% in our valuations. The discount rate used in determining each asset’s estimated fair value reflects the inherent risks associated with the related estimated cash flow stream, as well as current risk-free rates available in the market and estimated market risk premiums.
Our quarterly assessments reflect management’s best estimates. Due to the inherent uncertainties in management’s estimates and uncertainties related to our operations and our industry as a whole as further discussed in “Item 1A. Risk Factors” in Part I of this Annual Report on Form 10-K, we are unable to determine at this time if and to what extent future impairments will occur. Additionally, due to the volume of possible outcomes that can be generated from changes in the various model inputs for each community, we do not believe it is possible to create a sensitivity analysis that can provide meaningful information for the users of our financial statements.
Warranty Reserves. We record warranty reserves to cover our exposure to the costs for materials and labor not expected to be covered by our subcontractors to the extent they relate to warranty-type claims. Warranty reserves are established by charging cost of sales and crediting a warranty reserve for each home delivered. The warranty reserves for the Company’s Home Builder’s Limited Warranty (“HBLW”) are established as a percentage of average sales price and adjusted based on historical payment patterns determined, generally, by geographic area and recent trends. Factors that are given consideration in determining the HBLW reserves include: (1) the historical range of amounts paid per average sales price on a home; (2) type and mix of amenity packages added to the home; (3) any warranty expenditures not considered to be normal and recurring; (4) timing of payments; (5) improvements in quality of construction expected to impact future warranty expenditures; and (6) conditions that may affect certain projects and require a different percentage of average sales price for those specific projects. Changes in estimates for warranties occur due to changes in the historical payment experience and differences between the actual payment pattern experienced during the period and the historical payment pattern used in our evaluation of the warranty reserve balance at the end of each quarter. Actual future warranty costs could differ from our current estimated amount.
Our warranty reserves for our 30-year (offered on all homes sold after April 25, 1998 and on or before December 1, 2015 in all of our markets except our Texas markets), 15-year (offered on all homes sold after December 1, 2015 and on or before December 31, 2021 in all of our markets except our Texas markets) and 10-year (offered on all homes sold in our Texas markets and in all of our markets beginning January 1, 2022) transferable structural warranty programs are established on a per-unit basis. While the structural warranty reserve is recorded as each house is delivered, the sufficiency of the structural warranty per unit charge and total reserve is reevaluated on an annual basis, with the assistance of an actuary, using our own historical data and trends, industry-wide historical data and trends, and other project specific factors. The reserves are also evaluated quarterly and adjusted if we encounter activity that is inconsistent with the historical experience used in the annual analysis. These reserves are subject to variability due to uncertainties regarding structural defect claims for products we build, the markets in which we build, claim settlement history, insurance and legal interpretations, among other factors.
Our warranty reserve amounts are based upon historical experience and geographic location. While we believe that our warranty reserves are sufficient to cover our projected costs, there can be no assurances that historical data and trends will accurately predict our actual warranty costs. See Note 1 and Note 8 to our Consolidated Financial Statements for additional information related to our warranty reserves.
RESULTS OF OPERATIONS
Overview
In 2021, housing market conditions were positive, with healthy demand, a limited supply of new and resale inventory and relatively low interest rates driving record bottom line results for our business. Strong demand for our homes enabled us to increase selling prices in many of our communities in concert with rising labor and building material costs. This, in combination with our focus on balancing sales pace, price and construction starts at many of our communities, helped us to achieve record homes delivered, revenue, income before income taxes and net income and the second highest level of new contracts in our history, despite the supply chain challenges and disruptions that we experienced throughout 2021. Our backlog sales value and number of homes in backlog at December 31, 2021 were also year-end records. 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 in 2021.
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We believe that the homebuilding industry conditions that we experienced in 2021 will continue to support demand into 2022, subject to the economic uncertainties caused by rising interest rates, higher inflation, labor and supply shortages, and increased cost pressures described further below in our Outlook Section.
During the year ended December 31, 2021, we achieved the following record results in comparison to the year ended December 31, 2020:
• Homes delivered increased 12% to 8,638 homes - a record high for our Company
• Total sales value in backlog increased 29% to $2.4 billion - a year-end record for our Company
• Number of homes in backlog increased 10% - a year-end record for our Company
• Revenue increased 23% to $3.7 billion - a record high for our Company
• Income before income taxes increased 64% to $509.1 million - a record high for our Company
• Net income increased 65% to $396.9 million - a record high for our Company
In addition to the record results described above, our financial services operations also achieved record income before income taxes in 2021, 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 in 2021 improved to 4.1 per month compared to 3.7 per month in 2020. Partially as a result of this accelerated sales pace, we sold out of some communities earlier, and our number of active communities declined to 175 at the end of 2021 from 202 at the end of 2020. We continued to place additional land under contract for communities that will be brought online in future periods, and controlled approximately 44,000 lots at December 31, 2021. Our ability to timely replace existing communities could further impact our number of active communities. We continue to work to open new communities, and we are also actively managing sales at a community level, while selectively increasing prices, to better match our availability of lots and production schedule.
Summary of Company Financial Results in 2021
The calculations of adjusted income before income taxes, adjusted net income, and adjusted housing gross margin, each of which is a non-GAAP measure, are described and reconciled to income before income taxes, net income, and housing gross margin, respectively, which represent the most directly comparable financial measures calculated in accordance with GAAP, below under “Non-GAAP Financial Measures.”
Income before income taxes for the twelve months ended December 31, 2021 increased 64% from $310.0 million for the year ended December 31, 2020 to $509.1 million for the year ended December 31, 2021. Income before income taxes for 2021 was unfavorably impacted by $9.1 million of loss on early extinguishment of debt (as more fully discussed below and in Note 8 to our Consolidated Financial Statements). Income before income taxes for 2020 was unfavorably impacted by asset impairment charges of $8.4 million and $0.9 million of stucco-related repair costs. Excluding these charges in both 2021 and 2020, adjusted income before income taxes increased 62% from $319.3 million in 2020 to $518.2 million in 2021.
In 2021, we achieved net income of $396.9 million, or $13.28 per diluted share, which includes the after-tax impact of the loss on early extinguishment of debt noted above ($0.23 per diluted share), compared to net income of $239.9 million, or $8.23 per diluted share in 2020, which includes the after-tax impact of both the asset impairment charges and stucco-related charges noted above ($0.22 and $0.02 per diluted share, respectively). Excluding these charges in both periods, adjusted net income increased 64% from $246.9 million ($8.47 per diluted share) in 2020 to $403.9 million ($13.51 per diluted share) in 2021. Our effective tax rate was 22.1% in 2021 compared to 22.6% in 2020.
In 2021, we recorded record total revenue of $3.75 billion, of which $3.63 billion was from homes delivered, $13.4 million was from land sales, and $102.0 million was from our financial services operations. Revenue from homes delivered increased 23% from 2020 driven primarily by the 929 additional homes delivered in 2021 (a 12% increase) and a 10% increase in the average sales price of homes delivered ($39,000 per home delivered), which was primarily the result of the mix of homes delivered and higher demand. Revenue from land sales decreased $5.8 million from 2020 due primarily to fewer land sales in the current year compared to the prior year. Revenue from our financial services segment increased 17% to $102.0 million in 2021 as a result of an increase in loans closed and sold during the year
Total gross margin (total revenue less total land and housing costs) increased $232.6 million in 2021 compared to 2020 as a result of a $217.6 million improvement in the gross margin of our homebuilding operations (the sum of housing gross margin and land gross margin) and a $15.0 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 $215.3 million, due to the 12% increase in the number of homes delivered and the 10% increase in the average sales price of homes delivered ($39,000 per home delivered) compared to prior year. Our housing gross margin percentage improved 210 basis points from
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20.0% in the prior year to 22.1% in 2021. Exclusive of the asset impairment charges and stucco-related repair charges in 2020, our adjusted housing gross margin percentage improved 180 basis points. Our gross margin on land sales (land gross margin) improved $2.3 million in 2021 compared to 2020 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 $15.0 million in 2021 compared to 2020 as a result of increases in the number of loan originations.
We opened 72 new communities during 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 year to year depending on the mix of communities delivering homes. Due to the increase in demand that we have experienced since May 2020, we are selling through communities faster; therefore, our ability to replace existing communities timely could impact our ability to meet current demand.
For 2021, selling, general and administrative expense increased $33.5 million, which partially offset the increase in our gross margin discussed above, but improved as a percentage of revenue to 10.4% in 2021 from 11.7% in 2020. Selling expense increased $19.0 million from 2020 and improved as a percentage of revenue to 5.3% in 2021 from 5.9% in 2020. Variable selling expense for sales commissions contributed $19.5 million to the increase due to the higher number of homes delivered during the period, offset partially by a $0.5 million decrease in non-variable selling expense. General and administrative expense increased $14.5 million compared to 2020 but improved as a percentage of revenue from 5.8% in 2020 to 5.1% in 2021. The dollar increase in general and administrative expense was primarily due to a $14.2 million increase in compensation-related expenses due to our increased headcount and strong financial performance which led to higher incentive-based compensation, and a $0.3 million increase in miscellaneous expenses.
Outlook
We believe that new home sales will continue to benefit from a continued undersupply of available homes, mortgage rates that remain historically low, improving employment levels and positive consumer demographics, which are leading to a growing number of younger homebuyers moving to single family homes in suburban locations. However, we also expect that overall economic and homebuilding industry conditions in the United States in 2022 will continue to be negatively impacted by labor and supply shortages, inflation, and increasing costs of materials and labor. 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 2021, our ability to raise prices, together with cost management, enabled us to achieve a total gross margin percentage of 24.3%, an improvement of 210 basis points compared to 2020. We expect to experience shortages in materials and labor as well as price increases for materials and labor in 2022 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.
We are also closely monitoring mortgage availability and lending standards. While interest rates remain low by historical standards, mortgage rates are generally expected to increase during 2022 which could negatively impact affordability and mortgage availability.
We expect to continue to emphasize the following strategic business objectives in 2022:
• managing our land spend and inventory levels;
• opening new communities on schedule 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 2021, we invested $630.1 million in land acquisitions and $421.8 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, and we will adjust our land and inventory home investment spend accordingly. As a result of the unprecedented current market conditions, we are not providing land spending estimates for 2022 at this time.
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As a result of our accelerated pace of home sales, we sold through communities at a faster pace than anticipated in 2021. We ended 2021 with approximately 44,000 lots under control, which represents a 5.1 year supply of lots based on 2021 homes delivered, including certain lots that we anticipate selling to third parties. This represents an 11% increase from our approximately 39,500 lots under control at the end of 2020. We opened 72 communities and closed 99 communities in 2021, ending the year with a total of 175 communities, compared to 202 at the end of 2020. Of our total communities at the end of 2021, 72 offered our more affordable Smart Series designs, which are primarily designed for first-time homebuyers.
Although the timing of opening new communities and closing out existing communities is subject to substantial variation, we expect to open a record number of new communities in 2022, growing our community count by approximately 15% by the end of 2022 to more than 200 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.
Housing market demand has remained strong over the past year and continues as we enter fiscal 2022. However, future economic and homebuilding industry conditions and the demand for homes are subject to continued uncertainty due to many factors, including the impacts of inflation, materials and labor cost increases, supply chain disruptions and labor shortages, the ongoing impact of the pandemic and government directives, actions and economic relief efforts related thereto, and the further impact of these actions on the economy, mortgage rates and markets, employment levels, consumer confidence, and financial markets, among other things. These factors are highly uncertain and outside our control. As a result, our past performance may not be indicative of future results.
Segment Reporting
We have determined 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 Orlando, Florida
Cincinnati, Ohio Sarasota, Florida
Columbus, Ohio Tampa, Florida
Indianapolis, Indiana Austin, Texas
Minneapolis/St. Paul, Minnesota Dallas/Fort Worth, Texas
Detroit, Michigan Houston, Texas
San Antonio, Texas
Charlotte, North Carolina
Raleigh, North Carolina
Nashville, Tennessee
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The following table shows, by segment: revenue; gross margin; selling, general and administrative expense; operating income (loss); interest expense; and depreciation and amortization for the years ended December 31, 2021, 2020 and 2019:
Year Ended
(In thousands) 2021 2020 2019
Revenue:
Northern homebuilding $ 1,595,746 $ 1,256,405 $ 1,027,291
Southern homebuilding 2,048,113 1,702,727 1,417,676
Financial services (a)
102,028 87,013 55,323
Total revenue $ 3,745,887 $ 3,046,145 $ 2,500,290
Gross margin:
Northern homebuilding (b)
$ 331,521 $ 232,915 $ 182,887
Southern homebuilding (c)
475,366 356,415 251,217
Financial services (a)
102,028 87,013 55,323
Total gross margin (b) (c) (d)
$ 908,915 $ 676,343 $ 489,427
Selling, general and administrative expense:
Northern homebuilding $ 119,563 $ 107,327 $ 86,648
Southern homebuilding 162,705 153,854 136,135
Financial services (a)
39,737 33,618 27,973
Corporate 68,614 62,283 51,582
Total selling, general and administrative expense $ 390,619 $ 357,082 $ 302,338
Operating income (loss):
Northern homebuilding (b)
$ 211,958 $ 125,588 $ 96,239
Southern homebuilding (c)
312,661 202,561 115,082
Financial services (a)
62,291 53,395 27,350
Less: Corporate selling, general and administrative expense (68,614) (62,283) (51,582)
Total operating income (b) (c) (d)
$ 518,296 $ 319,261 $ 187,089
Interest expense (income):
Northern homebuilding $ 76 $ 2,465 $ 7,474
Southern homebuilding (464) 4,292 10,250
Financial services (a)
3,912 2,927 3,651
Corporate (1,368) — —
Total interest expense $ 2,156 $ 9,684 $ 21,375
Other income (e)
$ (2,046) $ (466) $ (311)
Loss on early extinguishment of debt (f)
9,072 — —
Income before income taxes $ 509,114 $ 310,043 $ 166,025
Depreciation and amortization:
Northern homebuilding $ 3,407 $ 3,342 $ 2,944
Southern homebuilding 3,644 4,468 4,778
Financial services 2,227 3,034 2,095
Corporate 7,637 6,734 6,133
Total depreciation and amortization $ 16,915 $ 17,578 $ 15,950
(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.
(b) Includes $0.6 million of acquisition-related charges taken during 2019 as a result of our acquisition of Pinnacle Homes in Detroit, Michigan on March 1, 2018.
(c) The year ended December 31, 2020 includes a $0.9 million net charge for stucco-related repair costs in certain of our Florida communities (as more fully discussed below and in Note 8 to our Consolidated Financial Statements).
(d) For the years ended December 31, 2020 and 2019, total gross margin and total operating income were reduced by $8.4 million and $5.0 million, respectively, related to asset impairment charges taken during the period.
(e) Other income is comprised of the gain on the sale of a non-operating asset during the fourth quarter of 2021 as well as equity in (income) loss from joint venture arrangements.
(f) Loss on early extinguishment of debt relates to the early redemption of our 5.625% senior notes due 2025 (the “2025 Senior Notes”) during the third quarter of 2021, consisting of a $7.1 million prepayment premium due to early redemption and $2.0 million for the write-off of unamortized debt issuance costs.
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The following tables show total assets by segment at December 31, 2021, 2020 and 2019:
At December 31, 2021
(In thousands) Northern Southern Corporate, Financial Services and Unallocated Total
Deposits on real estate under option or contract $ 4,123 $ 48,795 $ — $ 52,918
Inventory (a)
987,258 1,412,258 — 2,399,516
Investments in joint venture arrangements — 57,121 — 57,121
Other assets 37,527 63,844 (b)
628,927 730,298
Total assets $ 1,028,908 $ 1,582,018 $ 628,927 $ 3,239,853
At December 31, 2020
(In thousands) Northern Southern Corporate, Financial Services and Unallocated Total
Deposits on real estate under option or contract $ 5,031 $ 40,326 $ — $ 45,357
Inventory (a)
847,524 1,023,727 — 1,871,251
Investments in joint venture arrangements 1,378 33,295 — 34,673
Other assets 37,465 57,588 (b)
596,711
691,764
Total assets $ 891,398 $ 1,154,936 $ 596,711 $ 2,643,045
At December 31, 2019
(In thousands) Northern Southern Corporate, Financial Services and Unallocated Total
Deposits on real estate under option or contract $ 3,655 $ 24,877 $ — $ 28,532
Inventory (a)
783,972 957,003 — 1,740,975
Investments in unconsolidated joint ventures 1,672 36,213 — 37,885
Other assets 21,564 52,662 (b)
223,976 298,202
Total assets $ 810,863 $ 1,070,755 $ 223,976 $ 2,105,594
(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.
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Reportable Segments
The following table presents, by reportable segment, selected operating and financial information as of and for the years ended December 31, 2021, 2020 and 2019:
Year Ended December 31,
(Dollars in thousands) 2021 2020 2019
Northern Region
Homes delivered 3,592 3,071 2,482
New contracts, net 3,667 3,743 2,695
Backlog at end of period 1,890 1,815 1,143
Average sales price of homes delivered $ 443 $ 408 $ 411
Average sales price of homes in backlog $ 484 $ 436 $ 433
Aggregate sales value of homes in backlog $ 914,130 $ 792,029 $ 494,961
Housing revenue $ 1,591,125 $ 1,252,597 $ 1,020,362
Land sale revenue $ 4,621 $ 3,808 $ 6,929
Operating income homes (a) (b)
$ 210,841 $ 125,410 $ 96,108
Operating income land $ 1,117 $ 178 $ 131
Number of average active communities 86 93 91
Number of active communities, end of period 90 90 96
Southern Region
Homes delivered 5,046 4,638 3,814
New contracts, net 5,417 5,684 4,078
Backlog at end of period 2,945 2,574 1,528
Average sales price of homes delivered $ 404 $ 364 $ 367
Average sales price of homes in backlog $ 493 $ 406 $ 368
Aggregate sales value of homes in backlog $ 1,452,743 $ 1,044,878 $ 562,567
Housing revenue $ 2,039,344 $ 1,687,365 $ 1,399,986
Land sale revenue $ 8,769 $ 15,362 $ 17,690
Operating income homes (a) (c)
$ 310,550 $ 201,750 $ 114,715
Operating income land $ 2,111 $ 811 $ 367
Number of average active communities 97 122 127
Number of active communities, end of period 85 112 129
Total Homebuilding Regions
Homes delivered 8,638 7,709 6,296
New contracts, net 9,084 9,427 6,773
Backlog at end of period 4,835 4,389 2,671
Average sales price of homes delivered $ 420 $ 381 $ 384
Average sales price of homes in backlog $ 490 $ 419 $ 396
Aggregate sales value of homes in backlog $ 2,366,873 $ 1,836,907 $ 1,057,528
Housing revenue $ 3,630,469 $ 2,939,962 $ 2,420,348
Land sale revenue $ 13,390 $ 19,170 $ 24,619
Operating income homes (a) (b) (c) (d)
$ 521,391 $ 327,160 $ 210,823
Operating income land $ 3,228 $ 989 $ 498
Number of average active communities 183 215 218
Number of active communities, end of period 175 202 225
(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.
(b) Includes $0.6 million of acquisition-related charges taken during 2019 as a result of our acquisition of Pinnacle Homes in Detroit, Michigan on March 1, 2018.
(c) Includes a $0.9 million net charge for stucco-related repair costs in certain of our Florida communities (as more fully discussed below and in Note 8 to our Consolidated Financial Statements) taken during 2020.
(d) Includes $8.4 million and $5.0 million of asset impairment charges taken during the years ended December 31, 2020 and 2019, respectively.
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Year Ended December 31,
(Dollars in thousands) 2021 2020 2019
Financial Services
Number of loans originated 6,525 5,888 4,476
Value of loans originated $ 2,239,928 $ 1,843,576 $ 1,382,695
Revenue $ 102,028 $ 87,013 $ 55,323
Less: Selling, general and administrative expenses
39,737 33,618 27,973
Less: Interest expense 3,912 2,927 3,651
Income before income taxes $ 58,379 $ 50,468 $ 23,699
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 years ended December 31, 2021, 2020 and 2019:
Year Ended December 31,
2021 2020 2019
Northern 7.4 % 9.4 % 10.9 %
Southern 8.1 % 12.4 % 14.3 %
Total cancellation rate 7.8 % 11.2 % 13.0 %
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Non-GAAP Financial Measures
This report contains information about our adjusted housing gross margin, adjusted income before income taxes, and adjusted net income, each of which constitutes a non-GAAP financial measure. Because adjusted housing gross margin, adjusted income before income taxes, and adjusted net income are not calculated in accordance with GAAP, these financial measures may not be completely comparable to similarly-titled measures used by other companies in the homebuilding industry and, therefore, should not be considered in isolation or as an alternative to operating performance and/or financial measures prescribed by GAAP. Rather, these non-GAAP financial measures should be used to supplement our GAAP results in order to provide a greater understanding of the factors and trends affecting our operations.
Adjusted housing gross margin, adjusted income before income taxes, and adjusted net income are calculated as follows:
Year Ended December 31,
(Dollars in thousands) 2021 2020 2019
Housing revenue $ 3,630,469 $ 2,939,962 $ 2,420,348
Housing cost of sales 2,826,810 2,351,621 1,986,743
Housing gross margin 803,659 588,341 433,605
Add: Stucco-related charges (a)
— 860 —
Add: Impairment (b)
— 8,435 5,002
Add: Acquisition-related charges (c)
— — 639
Adjusted housing gross margin $ 803,659 $ 597,636 $ 439,246
Housing gross margin percentage 22.1 % 20.0 % 17.9 %
Adjusted housing gross margin percentage 22.1 % 20.3 % 18.1 %
Income before income taxes $ 509,114 $ 310,043 $ 166,025
Add: Stucco-related charges (a)
— 860 —
Add: Impairment (b)
— 8,435 5,002
Add: Acquisition-related charges (c)
— — 639
Add: Loss on early extinguishment of debt (d)
9,072 — —
Adjusted income before income taxes $ 518,186 $ 319,338 $ 171,666
Net income $ 396,868 $ 239,874 $ 127,587
Add: Stucco-related charges - net of tax (a)
— 654 —
Add: Impairment - net of tax (b)
— 6,411 3,802
Add: Acquisition-related charges - net of tax (c)
— — 486
Add: Loss on early extinguishment of debt - net of tax (d)
6,985 — —
Adjusted net income $ 403,853 $ 246,939 $ 131,875
(a) Represents warranty charges, net of recoveries, for stucco-related repair costs in certain of our Florida communities (as more fully discussed in Note 8 to our Consolidated Financial Statements).
(b) Represents asset impairment charges taken during the respective periods.
(c) Represents acquisition-related charges related to our acquisition of Pinnacle Homes in Detroit, Michigan on March 1, 2018 (as more fully discussed in Note 12 to our Consolidated Financial Statements).
(d) Loss on early extinguishment of debt relates to the early redemption of our 2025 Senior Notes during the third quarter of 2021, consisting of a $7.1 million prepayment premium due to early redemption and $2.0 million for the write-off of unamortized debt issuance costs.
We believe adjusted housing gross margin, adjusted income before income taxes, and adjusted net income are each relevant and useful financial measures to investors in evaluating our operating performance as they measure the gross profit, income before income taxes, and net income we generated specifically on our operations during a given period. These non-GAAP financial measures isolate the impact that the acquisition-related charges, stucco-related charges and impairment charges have on housing gross margins; the impact that the other income, loss on early debt extinguishment, acquisition-related charges, stucco-related charges and impairment charges have on income before income taxes; and that the other income, loss on early debt extinguishment, acquisition-related charges, stucco-related charges and impairment charges have on net income, and allow investors to make comparisons with our competitors that adjust housing gross margins, income before income taxes, and net income in a similar manner. We also believe investors will find these adjusted financial measures relevant and useful because they represent a profitability measure that may be compared to a prior period without regard to variability of the charges noted above. These financial measures assist us in making strategic decisions regarding community location and product mix, product pricing and construction pace.
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Year Over Year Comparisons
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
The calculation of adjusted housing gross margin (referred to below) is described and reconciled to housing gross margin, the financial measure that is calculated using our GAAP results, below under “Segment Non-GAAP Financial Measures.”
Northern Region. During the twelve months ended December 31, 2021, homebuilding revenue in our Northern region increased $339.3 million, from $1.3 billion in 2020 to $1.6 billion in 2021. This 27% increase in homebuilding revenue was the result of a 17% increase in the number of homes delivered (521 units), a 9% increase in the average sales price of homes delivered ($35,000 per home delivered) and a $0.8 million increase in land sale revenue. Operating income in our Northern region increased $86.4 million, from $125.6 million in 2020 to $212.0 million in 2021. The increase in operating income was primarily the result of a $98.6 million increase in our gross margin, offset, in part, by a $12.2 million increase in selling, general, and administrative expense. With respect to our homebuilding gross margin, our housing gross margin improved $97.7 million, due to the increases noted above. Our housing gross margin percentage improved 220 basis points from 18.6% in 2020 to 20.8% in 2021 largely due to improved demand, offset, in part, by increased construction and lot costs. Our housing gross margin was unfavorably impacted in 2020 by $8.4 million of asset impairment charges. Exclusive of these charges, our adjusted housing gross margin percentage improved 150 basis points. Our land sale gross margin improved $0.9 million as a result of the mix of lots sold in the current year compared to the prior year.
Selling, general and administrative expense increased from $107.3 million in 2020 to $119.6 million in 2021, but improved as a percentage of revenue to 7.5% in 2021 from 8.5% in 2020. The increase in selling, general and administrative expense was attributable, in part, to a $10.5 million increase in selling expense, due to (1) a $9.6 million increase in variable selling expenses resulting from increases in sales commissions produced by the higher number of homes delivered and (2) a $0.9 million increase in non-variable selling expenses primarily related to increased headcount and other 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 $3.5 million increase in compensation related expenses as a result of increased employee headcount and an increase in incentive compensation due to improved results, partially offset by a $1.8 million decrease in professional fees.
During 2021, we experienced a 2% decrease in new contracts in our Northern region, from 3,743 in 2020 to 3,667 in 2021 as a result of a decrease in our average number of communities and limiting sales in certain communities during the period. Backlog increased 4% from 1,815 homes at December 31, 2020 to 1,890 homes at December 31, 2021 which was attributable to improved demand in our Smart Series communities compared to the prior year. Average sales price in backlog increased to $484,000 at December 31, 2021 compared to $436,000 at December 31, 2020 which was primarily due to improved demand in our Northern Region in 2021 compared to prior year. During the twelve months ended December 31, 2021, we opened 40 new communities in our Northern region compared to 29 during 2020. Our monthly absorption rate in our Northern region improved to 3.6 per community in 2021, compared to 3.4 per community in 2020.
Southern Region. For the twelve months ended December 31, 2021, homebuilding revenue in our Southern region increased $345.4 million, from $1.7 billion in 2020 to $2.0 billion in 2021. This 20% increase in homebuilding revenue was primarily the result of a 9% increase in the number of homes delivered (408 units) and an 11% increase in the average sales price of homes delivered ($40,000 per home delivered), partially offset by a $6.6 million decrease in land sale revenue. Operating income in our Southern region increased $110.1 million from $202.6 million in 2020 to $312.7 million in 2021. This increase in operating income was the result of a $119.0 million improvement in our gross margin, offset, in part, by an $8.9 million increase in selling, general, and administrative expense. With respect to our homebuilding gross margin, our housing gross margin improved $117.7 million, due primarily to the increases in the number and average sales price of homes delivered noted above. Our housing gross margin percentage improved 210 basis points from 21.1% in 2020 to 23.2% in 2021 largely due to improved demand, offset, in part, by increased construction and lot costs. Exclusive of the stucco-related repair charges in 2020, our adjusted housing gross margin percentage remained 21.1%. Our land sale gross margin improved $1.3 million as a result of the mix of lots sold in the current year compared to the prior year.
Selling, general and administrative expense increased from $153.9 million in 2020 to $162.7 million in 2021 but declined as a percentage of revenue to 7.9% in 2021 from 9.0% in 2020. The increase in selling, general and administrative expense was attributable, in part, to a $7.7 million increase in selling expense due to a $10.0 million increase in variable selling expenses resulting from increases in sales commissions produced by the higher number of homes delivered, offset, in part, by a $2.3 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 $1.2 million increase in general and administrative expense, which was primarily related to a $2.5 million increase in compensation related
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expenses as a result of increased employee headcount and an increase in incentive compensation due to improved results, offset partially by a $1.3 million decrease in land-related expenses.
During 2021, we experienced a 5% decrease in new contracts in our Southern region, from 5,684 in 2020 to 5,417 in 2021 as a result of a decrease in our average number of communities and limiting sales in certain communities during the period. Backlog increased 14% from 2,574 homes at December 31, 2020 to 2,945 homes at December 31, 2021 primarily due to changes in product type and market mix, along with improvement in demand across our Southern markets compared to prior year. Average sales price in backlog increased to $493,000 at December 31, 2021 from $406,000 at December 31, 2020 primarily due to a change in product type and market mix and improved demand in our Southern Region. During 2021, we opened 32 communities in our Southern region compared to 40 in 2020. Our monthly absorption rate in our Southern region improved to 4.7 per community in 2021 from 3.9 per community in 2020.
Financial Services. Revenue from our mortgage and title operations increased $15.0 million, or 17%, from $87.0 million for the twelve months ended December 31, 2020 to a record $102.0 million for the twelve months ended December 31, 2021 as a result of an 11% increase in the number of loan originations, from 5,888 in 2020 to 6,525 in 2021, and an increase in the average loan amount from $313,000 in 2020 to $343,000 in 2021.
Our financial service operations ended 2021 with an $8.9 million increase in operating income compared to 2020, which was primarily due to the increase in our revenue discussed above partially offset by a $6.1 million increase in selling, general and administrative expense compared to 2020. The increase in selling, general and administrative expense was attributable to an increase in compensation expense related to our increase in employee headcount and an increase in incentive compensation due to improved results.
At December 31, 2021, M/I Financial provided financing services in all of our markets. Approximately 84% of our homes delivered during 2021 were financed through M/I Financial, compared to 85% during 2020. Capture rate is influenced by financing availability and can fluctuate from quarter to quarter.
Corporate Selling, General and Administrative Expenses. Corporate selling, general and administrative expense increased $6.3 million, from $62.3 million in 2020 to $68.6 million in 2021. The increase was primarily due to a $4.3 million increase in compensation expense due to increased headcount during the period, a $1.2 million increase related to costs associated with new information systems and a $0.8 million increase in advertising expenses.
Other income. Other income includes a $1.9 million gain on the sale of a non-operating asset that occurred during the fourth quarter of 2021 (see Note 1 to our Consolidated Financial Statements for more information) and equity in income from joint venture arrangements. Equity in income from joint venture arrangements represents our portion of pre-tax earnings from our joint venture arrangements where a special purpose entity is established (“LLCs”) with the other partners. The Company earned $0.1 million and $0.5 million of equity in income from its LLCs during 2021 and 2020, respectively.
Interest Expense - Net. Interest expense for the Company decreased $7.5 million from $9.7 million in the twelve months ended December 31, 2020 to $2.2 million in the twelve months ended December 31, 2021. This decrease was primarily the result of a decrease in average borrowings during 2021 compared to prior year, the redemption of our 2025 Senior Notes during the third quarter of 2021, the issuance of our 2030 Senior Notes, which were not outstanding during 2020 and have a lower interest rate than the 2025 Senior Notes and higher interest capitalization due to the high level of inventory we have under development compared to the prior year. Our weighted average borrowings decreased from $767.5 million in 2020 to $716.7 million in 2021. Our weighted average borrowing interest rate increased slightly from 5.53% in 2020 to 5.55% in the 2021 as a result of a change in the mix of borrowings in the current year compared to prior year.
Income Taxes. Our overall effective tax rate was 22.1% for the year ended December 31, 2021 and 22.6% for the year ended December 31, 2020. The decrease in the effective rate for the twelve months ended December 31, 2021 was primarily attributable to a $12.7 million tax benefit related to energy tax credits (see Note 14 to our Consolidated Financial Statements for more information).
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Segment Non-GAAP Financial Measures. This report contains information about our adjusted housing gross margin, which constitutes a non-GAAP financial measure. Because adjusted housing gross margin is not calculated in accordance with GAAP, this financial measure may not be completely comparable to similarly-titled measures used by other companies in the homebuilding industry and, therefore, should not be considered in isolation or as an alternative to operating performance and/or financial measures prescribed by GAAP. Rather, this non-GAAP financial measure should be used to supplement our GAAP results in order to provide a greater understanding of the factors and trends affecting our operations.
Adjusted housing gross margin for each of our reportable segments is calculated as follows:
Year Ended December 31,
(Dollars in thousands) 2021 2020
Northern region:
Housing revenue $ 1,591,125 $ 1,252,597
Housing cost of sales 1,260,721 1,019,860
Housing gross margin 330,404 232,737
Add: Impairment (a)
— 8,435
Adjusted housing gross margin $ 330,404 $ 241,172
Housing gross margin percentage 20.8 % 18.6 %
Adjusted housing gross margin percentage 20.8 % 19.3 %
Southern region:
Housing revenue $ 2,039,344 $ 1,687,365
Housing cost of sales 1,566,089 1,331,761
Housing gross margin 473,255 355,604
Add: Stucco-related charges (b)
— 860
Adjusted housing gross margin $ 473,255 $ 356,464
Housing gross margin percentage 23.2 % 21.1 %
Adjusted housing gross margin percentage 23.2 % 21.1 %
(a) Represents asset impairment charges taken during the respective periods.
(b) Represents warranty charges, net of recoveries, for stucco-related repair costs in certain of our Florida communities taken during 2020. See Note 8 to our Consolidated Financial Statements for further information.
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
For a comparison of our results of operations for the fiscal years ended December 31, 2020 and December 31, 2019, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on February 19, 2021.
LIQUIDITY AND CAPITAL RESOURCES
Overview of Capital Resources and Liquidity
At December 31, 2021, we had $236.4 million of cash, cash equivalents and restricted cash, with $236.0 million of this amount comprised of unrestricted cash and cash equivalents, which represents a $24.6 million decrease in unrestricted cash and cash equivalents from December 31, 2020. Our principal uses of cash during 2021 were investment in land and land development, construction of homes, mortgage loan originations, investment in joint ventures, operating expenses, short-term working capital, debt service requirements, including the redemption of our 2025 Senior Notes, and the repurchase of $51.5 million of our outstanding common shares under our 2021 Share Repurchase Program during the third and fourth quarters of 2021. 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, proceeds from the issuance of our 2030 Senior Notes (as described below), borrowings under our credit facilities, and other sources of liquidity.
The Company is a party to three primary credit agreements: (1) the Credit Facility, our $550 million unsecured revolving credit facility, with M/I Homes, Inc. as borrower and guaranteed by the Company’s wholly-owned homebuilding subsidiaries; (2) the MIF Mortgage Warehousing Agreement, our $175 million secured mortgage warehousing agreement (which increased to $210 million from September 25, 2021 to October 15, 2021 and to $235 million from November 15, 2021 to February 4, 2022),
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with M/I Financial as borrower; and (3) the MIF Mortgage Repurchase Facility, our $90 million mortgage repurchase agreement, with M/I Financial as borrower.
In August 2021, we issued $300.0 million aggregate principal amount of our 2030 Senior Notes at par, for net proceeds of approximately $296.0 million. We used $257.9 million of the net proceeds to redeem all $250.0 million aggregate principal amount of our outstanding 2025 Senior Notes at a redemption price of 102.813% of the principal amount, plus accrued and unpaid interest thereon. As of December 31, 2021, there were no borrowings outstanding and $85.0 million of letters of credit outstanding under the Credit Facility, leaving $465.0 million in available borrowings.
As of December 31, 2021, 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 totaling an aggregate principal amount of $966.2 million, with $266.2 million payable within 12 months. Future interest payments associated with these notes payable totaled $229.3 million as of December 31, 2021, with $31.6 million payable within 12 months.
We expect to continue managing our balance sheet and liquidity carefully in 2022 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 2022 from cash receipts and availability under our credit facilities, as well as excess cash balances.
During the year ended December 31, 2021, we delivered 8,638 homes, started 9,506 homes, and spent $630.1 million on land purchases and $421.8 million on land development.
We are selectively acquiring and developing lots in our markets to replenish and increase 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 December 31, 2021, we had a total of 19,364 lots under contract, with an aggregate purchase price of approximately $816.1 million, to be acquired during the period from 2022 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. 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. See Note 6 to our Consolidated Financial Statements for more information regarding these arrangements.
Operating Cash Flow Activities . During 2021, we used $16.8 million of cash in operating activities, compared to generating $168.3 million of cash from operating activities in 2020. The cash used in operating activities in 2021 was primarily a result of a $508.2 million increase in inventory, along with payments for mortgage loan originations which exceeded the proceeds from the sale of mortgage loans by $43.9 million, offset by net income of $396.9 million and a $121.7 million increase in accounts payable, customer deposits and other liabilities. The cash provided by operating activities in 2020 was primarily a result of net income of $239.9 million and a $128.7 million increase in accounts payable, customer deposits and other liabilities, offset partially by payments for mortgage loan originations which exceeded the proceeds from the sale of mortgage loans by $78.7 million and a $134.9 million increase in inventory.
Investing Cash Flow Activities. During 2021, we used $51.7 million of cash in investing activities, compared to using $33.9 million of cash in investing activities during 2020. This $17.8 million increase in cash usage was primarily due to an increase in our investments in joint venture arrangements.
Financing Cash Flow Activities. During 2021, we generated $44.1 million of cash from our financing activities, compared to generating $120.3 million of cash during 2020. The cash generated from financing activities in 2021 was primarily due to the issuance of $300.0 million of our 2030 Senior Notes, net of debt issuance costs, for $296.0 million, and net borrowings under our two M/I Financial credit facilities of $40.5 million, offset partially by the redemption of all $250.0 million of our then outstanding 2025 Senior Notes, and the repurchase of $51.5 million of our outstanding common shares during 2021 .
On July 28, 2021, the Company announced that its Board of Directors authorized the 2021 Share Repurchase Program pursuant to which the Company may purchase up to $100 million of its outstanding common shares (see Note 16 to our Consolidated Financial Statements). During 2021, the Company repurchased 0.8 million common shares with an aggregate purchase price of $51.5 million which was funded with cash on hand. As of December 31, 2021, the Company was authorized to repurchase an additional $48.5 million of outstanding common shares under the 2021 Share Repurchase Program. On February 17, 2022, the Company announced that its Board of Directors approved an increase to its 2021 Share Repurchase Program by an additional
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$100 million, leaving up to $148.5 million available for repurchase. See Note 17 to our Consolidated financial Statements and “Item 9B. Other Information”, for more information regarding the increase in the 2021 Share Repurchase Program.
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 first quarter of 2022. The timing and amount of any purchases under the 2021 Share Repurchase Program will be determined by the Company’s management at its discretion 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. The 2021 Share Repurchase Program replaced and superseded the share repurchase program authorized by the Board of Directors in 2018 which authorized the repurchase of $50 million of the Company’s common shares (the “2018 Share Repurchase Program”).
At December 31, 2021 and December 31, 2020, our ratio of homebuilding debt to capital was 30% and 34%, respectively, calculated as the carrying value of our outstanding homebuilding debt (which consists of borrowings under our Credit Facility, our 2030 Senior Notes, 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 December 31, 2021:
(In thousands) Expiration
Date Outstanding
Balance Available
Amount
Notes payable – homebuilding (a)
(a) $ — $ 465,037
Notes payable – financial services (b)
(b) $ 266,160 $ 2,043
(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 $1.3 billion of availability for additional senior debt at December 31, 2021. As a result, the full $550 million commitment amount of the facility was available, less any borrowings and letters of credit outstanding. There were no borrowings outstanding and $85.0 million of letters of credit outstanding at December 31, 2021, leaving $465.0 million available. The Credit Facility has an expiration date of July 18, 2025.
(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. The maximum aggregate commitment amount of M/I Financial's warehousing agreements as of December 31, 2021 was $325 million, which included a temporary increase for the MIF Mortgage Warehouse Agreement applicable through February 4, 2022 (as described below) at which time the maximum aggregate commitment amount under the two agreements reverted to $265 million. The MIF Mortgage Warehousing Agreement has an expiration date of May 27, 2022 and the MIF Mortgage Repurchase Facility has an expiration date of October 24, 2022.
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Notes Payable - Homebuilding.
Homebuilding Credit Facility . The Credit Facility provides for an aggregate commitment amount of $550 million, and also includes an accordion feature pursuant to which the maximum borrowing availability may be increased to an aggregate of $700 million, subject to obtaining additional commitments from lenders. The Credit Facility matures on July 18, 2025. 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 0.25%) plus a margin of 175 basis points (subject to adjustment in subsequent quarterly periods based on the Company’s leverage ratio). The Credit Facility includes a provision for the replacement of LIBOR under certain circumstances where one-month LIBOR is no longer available.
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 $150 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 $1.1 billion at December 31, 2021 (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). On February 16, 2022, the Company amended its Credit Facility to eliminate specified limits on the Company to make investments in its subordinated debt and capital stock. Such investments are subject to the Company’s compliance with the other covenants and provisions 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, 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 December 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 December 31, 2021:
Financial Covenant Covenant Requirement Actual
(Dollars in millions)
Consolidated Tangible Net Worth ≥ $ 1,087.4 $ 1,548.1
Leverage Ratio ≤ 0.60 0.25
Interest Coverage Ratio ≥ 1.5 to 1.0 17.0 to 1.0
Investments in Unrestricted Subsidiaries and Joint Ventures ≤ $ 464.4 $ 6.8
Unsold Housing Units and Model Homes ≤ 3,053 784
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 $175 million, which increased to $210 million from September 25, 2021 to October 15, 2021 and increased to $235 million from November 15, 2021 to February 4, 2022, which were periods of expected increases in the volume of mortgage originations. The MIF Mortgage Warehousing Agreement expires on May 27, 2022. 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 0.5%) plus a spread of 190 basis points. The MIF Mortgage Warehousing Agreement includes a provision for the replacement of LIBOR under certain circumstances where one-month LIBOR is no longer available.
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 27, 2022, 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
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certain loan types that can secure outstanding borrowings. There are currently no guarantors of the MIF Mortgage Warehousing Agreement.
As of December 31, 2021, there was $196.8 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 December 31, 2021:
Financial Covenant Covenant Requirement Actual
(Dollars in millions)
Leverage Ratio ≤ 10.0 to 1.0 8.7 to 1.0
Liquidity ≥ $ 7.0 $ 30.5
Adjusted Net Income > $ 0.0 $ 35.9
Tangible Net Worth ≥ $ 15.0 $ 33.7
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 24, 2022. 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 lender.
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 0.75% or 0.625% based on the type of loan ) plus 175 or 200 basis points depending on the loan type. The MIF Mortgage Repurchase Facility includes a provision for the replacement of LIBOR under certain circumstances where one-month LIBOR is no longer available. 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 December 31, 2021, there was $69.4 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 December 31, 2021.
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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 December 31, 2021, the Company was in compliance with all terms, conditions, and covenants under the indenture.
We used a portion of the net proceeds from the issuance of the 2030 Senior Notes to redeem all of our outstanding 2025 Senior Notes at a redemption price of 102.813% of the principal amount, plus accrued and unpaid interest thereon, on August 24, 2021. In connection with the early redemption of our 2025 Senior Notes, we incurred a $9.1 million loss on early extinguishment of debt, consisting of a prepayment premium of $7.1 million and the write-off of unamortized debt issuance costs of $2.0 million.
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 December 31, 2021, the Company was in compliance with all terms, conditions, and covenants under the indenture.
See Note 11 to our Consolidated Financial Statements for more information regarding the 2030 Senior Notes and the 2028 Senior Notes.
Supplemental Financial Information.
As of December 31, 2021, 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 and are listed on Exhibit 22 to this Form 10-K.
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
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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) December 31, 2021
Assets:
Cash $ 203,381
Investment in joint venture arrangements $ 50,648
Amounts due from Non-Guarantor Subsidiaries $ 6,455
Total assets $ 2,897,385
Liabilities and Shareholders’ Equity:
Total liabilities $ 1,320,337
Shareholders’ equity $ 1,577,048
Summarized Statement of Income Data
Year Ended
(In thousands) December 31, 2021
Revenues $ 3,643,859
Land and housing costs $ 2,836,972
Selling, general and administrative expense $ 349,478
Income before income taxes $ 452,036
Net income $ 352,028
Weighted Average Borrowings. In 2021 and 2020, our weighted average borrowings outstanding were $716.7 million and $767.5 million, respectively, with a weighted average interest rate of 5.55% and 5.53%, respectively. The decrease in our weighted average borrowings related to a decrease in borrowings under our two MIF credit facilities during 2021 compared to 2020.
At both December 31, 2021 and December 31, 2020, we had no borrowings outstanding under the Credit Facility. During the twelve months ended December 31, 2021, the average daily amount outstanding and the maximum amount outstanding under the Credit Facility were both zero, and during the twelve months ended December 31, 2020, the average daily amount outstanding under the Credit Facility was $17.3 million and the maximum amount outstanding under the Credit Facility was $111.3 million. Based on our currently anticipated spending on home construction, overhead expenses, share repurchases and land acquisition and development in 2022, offset by expected cash receipts from home deliveries and other sources, we may borrow under the Credit Facility during 2022, but do not expect the peak amount outstanding to exceed $150 million. The actual amount borrowed in 2022 (and the estimated peak amount outstanding) 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 2021 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 $85.0 million of letters of credit issued and outstanding under the Credit Facility at December 31, 2021. During 2021, the average daily amount of letters of credit outstanding under the Credit Facility was $79.0 million and the maximum amount of letters of credit outstanding under the Credit Facility was $95.6 million.
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At December 31, 2021, M/I Financial had $196.8 million outstanding under the MIF Mortgage Warehousing Agreement. During 2021, the average daily amount outstanding under the MIF Mortgage Warehousing Agreement was $17.9 million and the maximum amount outstanding was $196.8 million, which occurred during December, while the temporary increase provision was in effect and the maximum borrowing availability was $235.0 million.
At December 31, 2021, M/I Financial had $69.4 million outstanding under the MIF Mortgage Repurchase Facility. During 2021, the average daily amount outstanding under the MIF Mortgage Repurchase Facility was $43.2 million and the maximum amount outstanding was $78.6 million, which occurred during April.
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.
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.