What changed in this filing

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Item 1A. Risk Factors

2023-02-17 compared with 2022-02-17 · 48 added, 47 removed, 232 unchanged (29% of the section changed)

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We cannot predict their occurrence or severity, nor can we provide assurance that our strategic responses to their impacts would be successful.

In the event of a downturn in the homebuilding and mortgage lending industries, or if the national economy weakens, we could experience declines in the market value of our inventory and demand for our homes, which could have a significantly negative impact on our gross margins from home sales and financial condition and results of operations.

Additional external factors, such as foreclosure rates, mortgage pricing and availability, and unemployment rates, could also negatively impact our results.

Potential customers may be less willing or able to buy our homes if any of these conditions have a negative impact on the homebuilding industry.

We began to experience a slowdown in the homebuilding and mortgage lending industries during the second half of 2022.

As the national economy weakened and inflation and mortgage interest rates rose at unprecedented rates, we experienced a decline in the demand for our homes.

Continued decline in the homebuilding and mortgage lending industries and overall economy could decrease the market value of our inventory which could have a negative impact on our gross margins form home sales.

A reduction in our gross margins from home sales could have a significantly negative impact on our financial position and results of operations.

Additional external factors, such as foreclosure rates, mortgage availability, high inflation, and unemployment rates, could also negatively impact our results.

Increased mortgage interest rates have made it increasingly difficult for potential customers to qualify for sufficient financing, which is contributing to the affordability issues negatively impacting the homebuilding and mortgage lending industries.

Customers may be less willing or able to buy our homes if these conditions continue to impact the homebuilding industry.

We are closely monitoring our sales prices and have begun to offer sales incentives and mortgage rate buy-down programs and adjust base sales prices in certain circumstances and in certain communities, which will negatively impact our sales prices and future gross margins.

Our cancellation rate has increased significantly from 2021 as buyers are walking away from home purchases due to affordability issues.

In the future, our pricing strategies may be limited by market conditions.

We may be unable to change the mix of our home offerings, reduce the costs of the homes we build or offer more affordable homes to maintain our gross margins or satisfactorily address changing market conditions in other ways.

In addition, cancellations of home sales contracts in backlog may increase.

While the absorption pace of our new contracts per community improved in 2021 compared to 2020, a decline in sales activity could adversely affect our results of operations, financial condition and cash flows.

We may be unable to change the mix of our home offerings, reduce the costs of the homes we build or offer more affordable homes to

maintain our gross margins or satisfactorily address changing market conditions in other ways.

In addition, cancellations of home sales contracts in backlog may continue to increase.

Our absorption rate during 2022 declined to 3.1 per community compared to prior year’s 4.1 (a record high).

Any further decline in sales activity could adversely affect our results of operations, financial condition and cash flows.

Our financial services business is closely related to our homebuilding business, as it originates mortgage loans principally on behalf of purchasers of the homes we build.

A decrease in the demand for our homes because of the existence of any of the foregoing conditions could also adversely affect the financial results of this segment of our business.

As the demand for our homes declined during 2022, the financial results of our financial services segment also declined.

Additionally, we may be subject to increased counterparty risks, including purchasers of mortgages originated by M/I Financial being unwilling or unable to perform their obligations to us.

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To the extent that we are unable to adequately compete with other companies that originate mortgage loans, the results of operations from our mortgage operations may be negatively impacted.

A reduction in the availability of mortgage financing or a significant increase in mortgage interest rates or down payment requirements could adversely affect our business.

Any reduction in the availability of the financing provided by Fannie Mae and Freddie Mac could adversely affect interest rates, mortgage availability and our sales of new homes and origination of mortgage loans.

Further reduction in the availability of mortgage financing or continued increases in mortgage interest rates or down payment requirements could adversely affect our business.

Mortgage interest rates increased significantly in 2022 from historical lows, which increased the costs of owning a home and reduced the demand for our homes.

The additional increases forecasted by the Federal Reserve could further increase the costs of owning a home and reduce the demand for our homes.

In addition, any reduction in the availability of the financing provided by Fannie Mae and Freddie Mac could adversely affect interest rates, mortgage availability and our sales of new homes and origination of mortgage loans.

FHA and VA mortgage financing support remains an important factor in marketing our homes.

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Even if potential customers do not need financing, changes in the availability of mortgage products may make it harder for them to sell their current homes to potential buyers who need financing, which may lead to lower demand for new homes.

Mortgage interest rates remained near historical lows for the last several years.

Increases in interest rates increase the costs of owning a home and could reduce the demand for our homes.

Many of our homebuyers obtain financing for their home purchases from M/I Financial.

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Our ability to obtain land for new communities may be adversely affected by changes in the general availability of land, the willingness of land sellers to sell land at reasonable prices, competition for available land, availability of financing to acquire land, zoning, regulations that limit housing density and other market conditions.

supply of land, and especially developed lots, appropriate for development of communities is limited because of these factors, or for any other reason, the number of homes that we build and sell may decline.

If the supply of land, and especially developed lots, appropriate for development of communities is limited because of these factors, or for any other reason, the number of homes that we build and sell may decline.

To the extent that we are unable to timely purchase land or enter into new contracts for the purchase of land at reasonable prices, our revenue and results of operations could be negatively impacted and/or we could be required to scale back our operations in a given market.

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We must anticipate demand for new homes several years prior to homes being sold to homeowners.

There are significant risks inherent in controlling or purchasing land, especially as the demand for new homes fluctuates and land purchases become more competitive, as has recently been the case, which can increase the costs of land.

There are significant risks inherent in controlling or purchasing land, especially as the demand for new homes fluctuates and land purchases become more competitive, which can increase the costs of land.

There is often a significant lag time between when we acquire land for development and when we sell homes in neighborhoods we have planned, developed and constructed.

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In addition, inventory carrying costs can be significant, and fluctuations in value can reduce profits.

Economic conditions could require that we sell homes or land at a loss, or hold land in inventory longer than planned, which could significantly impact our financial condition, results of operations, cash flows and stock performance.

Additionally, if conditions in the homebuilding industry decline in the future, we may be required to evaluate our inventory for potential impairment, which may result in additional valuation adjustments, which could be significant and could negatively impact our financial results and condition.

Economic conditions could require that we sell homes or land at a loss, hold land in inventory longer than planned or walk away from land that we no longer intend to purchase resulting in write-offs of land deposits, which could significantly impact our financial condition, results of operations, cash flows and stock performance.

We recorded an aggregate loss of $18.4 million during the fourth quarter of 2022 that included $10.2 million of write-offs of land deposits for land we no longer intend to purchase as a result of our efforts to right-size our land portfolio and $8.2 million of asset impairment charges.

Additionally, as conditions in the homebuilding industry decline, we are required to evaluate our inventory for potential impairment, which may result in additional valuation adjustments, which could be significant and could negatively impact our financial results and condition.

We cannot make any assurances that the measures we employ to manage inventory risks and costs will be successful.

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To the extent that market conditions prevent the recovery of increased costs, including, among other things, subcontracted labor, developed lots, building materials, and other resources, through higher sales prices, our gross margins from home sales and results of operations could be adversely affected.

Due to current strong overall housing demand, we have experienced disruptions in our supply chain, including the availability and shortage of labor and certain building materials and finishing products, such as cabinets and appliances, which have lengthened the production cycles in certain markets and caused increased costs for labor and building materials.

In 2021, we were able to manage through these disruptions and cost increases by raising prices, together with cost management.

However, if labor and building material shortages, and cost increases continue, our gross margins and results of operations could be adversely affected if we are unable to continue to increase prices or manage through other cost saving changes.

We continued to experience disruptions in our supply chain during 2022, including the availability and shortage of labor and certain building materials and finishing products, such as cabinets and appliances, which lengthened the production cycles in certain markets and increased costs for labor and building materials.

In 2022, we were able to manage through these disruptions and cost increases by raising prices and managing other costs.

We depend on the continued availability of and satisfactory performance of subcontracted labor for the construction of our homes and to provide related materials.

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We may not be able to offset the impact of inflation through price increases.

Inflation can have a long-term adverse impact on us because if the costs of land, materials and labor increase, we would need to increase the sale prices of our homes to maintain satisfactory margins.

In a highly inflationary environment, we may not be able to raise home prices enough to keep pace with the increased costs of land and house construction, which could reduce our profit margins.

Given the inflation rates in 2021, we have experienced and may continue to experience in 2022, increases in the costs of land, materials and labor.

In addition, significant inflation is often accompanied by higher interest rates, which have a negative impact on demand for our homes, and would likely also increase our cost of capital.

Inflation can have a long-term adverse impact on us because if our costs of land, materials and labor increase, we would need to increase the sale prices of our homes to maintain satisfactory margins.

As a result of the historically high rates of inflation in 2022, we experienced, and expect to continue to experience into 2023, increases in the costs of land, materials and labor.

In such a highly inflationary environment, we may not be able to raise home prices enough to keep pace with the increased costs of land and house construction, which could reduce our profit margins.

Our limited geographic diversification could adversely affect us if the demand for new homes in our markets declines.

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Our limited geographic diversification could adversely impact us if the demand for new homes or the level of homebuilding activity in our current markets declines, since there may not be a balancing opportunity in a stronger market in other geographic regions.

Changes in energy prices may have an adverse effect on the economies in certain markets we operate in and our cost of building homes.

The economies of some of the markets in which we operate are impacted by the health of the energy industry.

To the extent that energy prices decline, the economies of certain of our markets may be negatively impacted which could have a material adverse effect on our business.

Furthermore, the pricing offered by our suppliers and subcontractors can be adversely affected by increases in various energy costs resulting in a negative impact on our financial condition, results of operations and cash flows.

We may write-off intangible assets, such as goodwill.

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Because of the high degree of judgment required in determining these liability reserves, our actual future liability could differ significantly from our reserves.

Given the inherent uncertainties, we cannot provide assurance that

our insurance coverage, our subcontractor arrangements and our reserves will be adequate to address all of our construction defect, product liability and warranty claims.

Given the inherent uncertainties, we cannot provide assurance that our insurance coverage, our subcontractor arrangements and our reserves will be adequate to address all of our construction

defect, product liability and warranty claims.

If the costs to resolve these claims exceed our estimates, our results of operations, financial condition and cash flows could be adversely affected.

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In addition, under the terms of the Credit Facility, the indentures governing the 2030 Senior Notes and the 2028 Senior Notes and the documents governing our other indebtedness, we have the ability, subject to applicable debt covenants, to incur additional indebtedness.

The incurrence of additional indebtedness could magnify other risks related to us and our business.

Our incurrence of additional indebtedness could magnify other risks related to us and our business.

Our indebtedness and any future indebtedness we may incur could have a significant adverse effect on our future financial condition.

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Such restrictions and regulations could increase our operating and compliance costs and have an adverse effect on our results of operations, financial condition or business.

ESG matters have also attracted increasing governmental and societal attention, which may expand our reporting, diligence, and disclosure on topics including climate change, waste production, water usage, human capital, labor, and risk oversight, and the nature, scope, and complexity of matters that we are required to control, assess, and report.

The rapidly evolving laws, regulations, policies and related interpretations, as well as increased enforcement actions by various governmental and regulatory agencies, relating to ESG matters including climate change may create challenges for the Company, alter the environment in which we do business and increase compliance costs, which could adversely impact our results of operations and cash flows.

We must also obtain licenses, permits and approvals from various governmental authorities in connection with our development activities, and these governmental authorities often have broad discretion in exercising their approval authority.

During 2022, we experienced delays in receiving governmental and municipality approvals in certain of our community locations, and we expect that we may experience a similar level of delays in 2023.

Governmental authorities may also restrict or place moratoriums on the availability of utilities, such as water and sewer taps.

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Because of the seasonal nature of our business, our quarterly operating results can fluctuate.

Although we are currently experiencing less seasonality than we have historically experienced as a result of limiting sales in nearly half of our communities and the supply chain and labor disruptions increasing cycle times, we have historically experienced seasonality and quarter-to-quarter variability in homebuilding activity levels.

We have historically experienced seasonality and quarter-to-quarter variability in homebuilding activity levels.

In general, the number of homes delivered and associated home sales revenue have increased during the third and fourth quarters, compared with the first and second quarters.

We believe that this type of seasonality reflects the historical tendency of homebuyers to purchase new homes in the spring and summer with deliveries scheduled in the fall or winter, as well as the scheduling of construction to accommodate seasonal weather conditions in certain markets.

There can be no assurance that this seasonality pattern will continue to exist in future reporting periods.

There can be no assurance that this seasonality

pattern will continue to exist in future reporting periods.

In addition, as a result of such variability, our historical performance may not be a meaningful indicator of future results.

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We have implemented systems and processes intended to address ongoing and evolving cyber security risks, secure our information technology, applications and computer systems, and prevent unauthorized access to or loss of sensitive, confidential and personal data.

We also provide regular personnel awareness training regarding potential cyber security threats, including the use of internal tips, reminders and phishing assessments, to help ensure employees remain diligent in identifying potential risks.

We adhere to the NIST CSF Framework to ensure we have proper controls in place to reduce our risk to cyber security threats.

We also depend on various partners and providers, and our mortgage software service partners, to secure our home buyers’ personal identifiable and confidential information.

We provide regular personnel awareness training regarding potential cyber security threats, including the use of internal tips, reminders and phishing assessments, to help ensure employees remain diligent in identifying potential risks.

In addition, we have deployed monitoring capabilities to support early detection, internal and external escalation, and effective responses to potential anomalies.

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In addition, breaches of our information technology systems or data security systems, including cyber attacks, could result in the unintended and/or unauthorized public disclosure or the misappropriation of proprietary, personal identifying and confidential information (including information we collect and retain in connection with our business about our homebuyers, business partners and employees), and require us to incur significant expense (that we may not be able to recover in whole or in part from our service providers or responsible parties, or their or our insurers) to address and remediate or otherwise resolve.

The unintended and/or unauthorized public disclosure or the misappropriation of proprietary, personal identifying or confidential information may also lead to litigation or other proceedings against us by affected individuals and/or business partners and/or by regulators, and the outcome of such proceedings, which could include losses, penalties, fines, injunctions, expenses and charges recorded against our earnings, could have a material and adverse effect on our financial condition, results of operations and cash flows and harm our reputation.

In addition, the costs of maintaining adequate protection against such threats, based on considerations of their evolution, increasing sophistication, pervasiveness and frequency and/or increasingly

demanding government-mandated standards or obligations regarding information security and privacy, could be material to our consolidated financial statements in a particular period or over various periods.

The unintended and/or unauthorized public disclosure or the misappropriation of proprietary, personal identifying or

confidential information may also lead to litigation or other proceedings against us by affected individuals and/or business partners and/or by regulators, and the outcome of such proceedings, which could include losses, penalties, fines, injunctions, expenses and charges recorded against our earnings, could have a material and adverse effect on our financial condition, results of operations and cash flows and harm our reputation.

In addition, the costs of maintaining adequate protection against such threats, based on considerations of their evolution, increasing sophistication, pervasiveness and frequency and/or increasingly demanding government-mandated standards or obligations regarding information security and privacy, could be material to our consolidated financial statements in a particular period or over various periods.

We depend on the services of certain key employees, and the loss of their services could hurt our business.

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If we are unable to retain our key employees or attract, train and retain other skilled personnel in the future, our operations could be materially and adversely impacted and we may incur additional expenses to identify and train new personnel.

Risks Related to the COVID-19 Pandemic and Other External Factors

Our business could be materially and adversely disrupted by COVID-19 or another epidemic, pandemic or similar public health issue, or fear of such an event, and the measures that international, federal, state and local public health and governmental authorities implement to address it.

Our business could be materially and adversely disrupted by an epidemic, pandemic or similar public health issue, or fear of such an event, and the measures that international, federal, state and local public health and governmental authorities implement to address it.

An epidemic, pandemic or similar public health issue, or fear of such an event, and the measures undertaken by governmental authorities to address it, could significantly disrupt or prevent us from operating our business in the ordinary course for an extended period, and thereby, and/or along with any associated economic and/or social instability or distress, have a material adverse effect on our business, results of operations, financial condition and/or cash flows.

On March 11, 2020, the World Health Organization characterized the outbreak of COVID-19 as a global pandemic.

Numerous international, federal, state and local governmental authorities took extraordinary and wide-ranging actions to contain and combat the outbreak and spread of COVID-19, including quarantines, “stay-at-home” orders, social distancing guidelines and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations.

In response, we took a number of actions to help ensure the health and safety of our employees, customers and building partners and to comply with applicable health and safety requirements.

These actions, together with the uncertainty resulting from the pandemic, impacted our ability to operate in the ordinary course consistent with past practice and negatively impacted our business in the latter half of March 2020 and continuing through April 2020.

As state and local governments began to ease public health restrictions and economic activity resumed, we gradually resumed many of our normal operations.

This, combined with the strong demand for new homes, caused our sales and closings to improve significantly during the remainder of 2020, and they remained strong in 2021.

However, there is continuing uncertainty regarding the extent to which and how long the COVID-19 pandemic and the related governmental actions will impact the U.S.

economy, including the supply chain, the labor market, consumer confidence, capital markets, secondary mortgage markets, availability of mortgage loans and demand for homes.

The impact of the COVID-19 pandemic on our business will depend on future developments, including whether governmental authorities impose additional health and safety measures, the outbreak, duration and severity of new variants, the acceptance and effectiveness of vaccines, and the impact of the pandemic on our employees, customers, and building partners.

The impact of an epidemic, pandemic or similar public health issue on our business will depend on future developments, including whether governmental authorities impose additional health and safety measures, the outbreak, duration and severity of new variants, the acceptance and effectiveness of vaccines, and the impact of the pandemic on our employees, customers, and building partners.

These developments are highly uncertain and outside of our control.

To the extent the COVID-19 pandemic has a significant adverse effect on the U.S.

To the extent an epidemic, pandemic or similar public health issue has a significant adverse effect on the U.S.

economy, our business, results of operations, financial condition and/or cash flows could be materially adversely effected.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1A. Risk Factors