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 143,400 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; Fort Myers/Naples, Tampa, Sarasota and Orlando, Florida; Austin, Dallas/Fort Worth, Houston and San Antonio, Texas; Charlotte and Raleigh, North Carolina; and Nashville, Tennessee.
Included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are the following topics relevant to the Company’s performance and financial condition:
• 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.
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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 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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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, 2022, 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. During the fourth quarter of 2022, we recorded an aggregate loss of $18.4 million that included $10.2 million of write-offs of land deposits for land we no longer intend to purchase in order to right-size our land portfolio and $8.2 million of asset impairment charges.
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
We began to experience weakening in homebuyer demand during the second half of 2022. The robust housing market of the previous 18 months began to decline as a result of the uncertain macroeconomic conditions in the broader U.S. economy, particularly the historic rise in mortgage interest rates and the high rate of inflation not experienced since the 1970s. We believe that these economic conditions, together with housing affordability issues and consumer fears of an economic recession, caused many potential homebuyers to postpone their homebuying decisions. As a result of this weakening demand, our new contracts and homes delivered declined 27% and 3%, respectively, in 2022 from 2021. In addition, our company-wide absorption pace of sales per community in 2022 declined to 3.1 per month compared to 4.1 per month in 2021 as a result of the declining market conditions. Our average number of selling communities increased to 196 at the end of 2022 from 175 at the end of 2021.
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Despite these challenges, we achieved the following results during the year ended December 31, 2022 in comparison to the year ended December 31, 2021, all of which represented record highs for the Company:
• Revenue increased 10% to $4.1 billion
• Income before income taxes increased 25% to $635.2 million
• Net income increased 24% to $490.7 million
• Shareholders’ equity of $2.1 billion
Our improved profitability is attributable primarily to improved margins and overhead leverage when compared to 2021 as consumer demand for housing remained robust in 2021 and early 2022 when the majority of our homes delivered during 2022 were placed under contract, driving record financial results for our business.
We believe that the economic uncertainties caused by increased interest rates, historically high inflation, labor and supply shortages, and increased cost pressures will continue into 2023. However, we continue to believe long-term housing market fundamentals remain strong, including favorable demographics and a limited supply of new and resale inventory. In January 2023, we sold approximately 630 homes, an 18% decrease compared to January 2022, but an approximate 60% sequential increase compared to average monthly sales during the second half of 2022. We have also experienced an increase in traffic compared to prior year’s January.
Given the uncertainty in the housing market and the general economy, we may choose to delay the development and opening of some new communities to match homebuyer demand in 2023. 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 in order to right-size our land portfolio and $8.2 million of asset impairment charges.
Summary of Company Financial Results in 2022
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, 2022 increased 25% from $509.1 million for the year ended December 31, 2021 to $635.2 million for the year ended December 31, 2022. Income before income taxes was unfavorably impacted by $18.4 million of asset impairment charges and deposit write-offs in 2022 and by $9.1 million pre-tax charge for loss on early extinguishment of debt related to the redemption of our 2025 Senior Notes (as more fully discussed below and in Note 8 to our Consolidated Financial Statements) in 2021. Excluding these charges in both 2022 and 2021, adjusted income before income taxes increased 26% from $518.2 million in 2021 to $653.6 million in 2022.
In 2022, we achieved net income of $490.7 million, or $17.24 per diluted share, which includes the after-tax impact of the asset impairment charges and deposit write-offs noted above ($0.50 per diluted share), compared to net income of $396.9 million, or $13.28 per diluted share in 2021, which includes the after-tax impact of the loss on early extinguishment of debt noted above ($0.23 per diluted share). Excluding these charges in both periods, adjusted net income increased 25% from $403.9 million ($13.51 per diluted share) in 2021 to $504.6 million ($17.74 per diluted share) in 2022. Our effective tax rate was 22.8% in 2022 compared to 22.1% in 2021.
In 2022, we recorded record total revenue of $4.13 billion, of which $4.01 billion was from homes delivered, $34.8 million was from land sales, and $86.2 million was from our financial services operations. Revenue from homes delivered increased 10% from 2021 driven primarily by a 14% increase in the average sales price of homes delivered ($59,000 per home delivered), which was primarily in response to robust consumer demand in 2021 and early 2022 when the majority of our homes delivered during the quarter were placed under contract, offset partially by a 3% decrease in the number of homes delivered in 2022 (272 units), which was due to reduced demand for new homes as well as increased year-over-year cycle times related to supply chain issues and labor shortages. Revenue from land sales increased $21.4 million from 2021 due primarily to more land sales in the current year compared to the prior year. Revenue from our financial services segment decreased 16% to $86.2 million in 2022 as a result of a decrease in loans closed and sold during the year, in addition to lower margins on loans sold during the period compared to the prior year.
Total gross margin (total revenue less total land and housing costs) increased $135.0 million in 2022 compared to 2021 as a result of a $150.8 million improvement in the gross margin of our homebuilding operations (the sum of housing gross margin and land gross margin), offset partially by a $15.8 million decline 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
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$142.3 million, due to the 14% increase in the average sales price of homes delivered ($59,000 per home delivered) compared to prior year, partially offset by the 3% decrease in the number of homes delivered. Our housing gross margin percentage improved 150 basis points from 22.1% in the prior year to 23.6% in 2022. Exclusive of the asset impairment charges and deposit write-offs in 2022, our adjusted housing gross margin percentage improved 190 basis points. Our gross margin on land sales (land gross margin) improved $8.6 million in 2022 compared to 2021 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 declined $15.8 million in 2022 compared to 2021 as a result of a decreases in the number of loan originations and lower margins on loans sold, partially offset by an increase in the average loan amount during 2022 compared to prior year.
We opened an all-time record 101 new communities during 2022. We sell a variety of home types in various communities and markets, each of which yields a different gross margin. The timing of the openings of new replacement communities as well as underlying lot costs varies from year to year. The mix of communities delivering homes may cause fluctuations in our new contracts and housing gross margin from year to year.
For 2022, selling, general and administrative expense increased $15.8 million, which partially offset the increase in our gross margin discussed above, but improved as a percentage of revenue to 9.8% in 2022 from 10.4% in 2021. General and administrative expense increased $22.8 million compared to 2021 and also increased as a percentage of revenue from 5.1% in 2021 to 5.2% in 2022. The dollar increase in general and administrative expense was primarily due to an $11.5 million increase in compensation-related expenses due to our increased headcount and strong financial performance which led to higher incentive-based compensation, a $2.5 million increase in land-related costs primarily due to write-offs of abandoned land transaction costs and a $8.8 million increase in miscellaneous expenses. Selling expense decreased $7.0 million from 2021 and improved as a percentage of revenue to 4.6% in 2022 from 5.3% in 2021, partially offsetting the increase in general and administrative expense above. Variable selling expense for sales commissions contributed $8.7 million to the decrease due to the lower number of homes delivered during the period, offset partially by a $1.7 million increase in non-variable selling expense primarily related to increased costs associated with our sales offices and models.
Outlook
Housing market conditions began to decline during the second half of 2022, resulting in significantly weakened overall demand for new homes. We attribute this decline in demand to various macroeconomic conditions, including steep increases in mortgage rates since January 2022, substantial increases in home prices over the past two years, the high rate of inflation, and economic recession concerns of our potential homebuyers. The extent to which these factors will continue to impact our business is highly uncertain and unpredictable, and our past performance should not be considered indicative of our future results on any metric or set of metrics given the uncertainty in the U.S. economy.
Despite these negative economic developments, we believe that the homebuilding industry will continue to benefit over the long term from a continued undersupply of available homes, positive consumer demographics, scarcity of rentals and increasing rent prices.
We believe that we are well positioned to manage through these challenging economic conditions with our affordable product offerings, lot supply and planned new community openings. We remain sensitive to the changes in market conditions, and continue to focus on controlling overhead leverage, carefully managing our investment in land and land development spending and offering incentives, including mortgage interest rate buy-downs, to retain our backlog and improve our sales pace. Our strong balance sheet and liquidity position should also provide us with the flexibility to operate effectively through changing economic conditions. However, we cannot provide any assurances that the strategic business objectives listed below will remain successful, and we may need to adjust elements of our strategy to effectively address evolving market conditions.
We expect to continue to emphasize the following strategic business objectives in 2023:
• managing our land spend and inventory levels;
• opening new communities;
• managing overhead spend;
• maintaining a strong balance sheet and liquidity levels; and
• emphasizing customer service, product quality and design, and premier locations.
During 2022, we invested $341.1 million in land acquisitions and $496.2 million in land development. We invested in less land acquisitions in 2022 due to declining demand for new homes and invested more in land development to finish lots needed to start homes and allow us to open new communities in an effort to increase demand and sales. 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
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adjust our land and investment spend accordingly. As a result of the unprecedented current market conditions with municipality delays, extended cycle times, and increased mortgage interest rates impacting sales, we are not providing land spending estimates for 2023 at this time.
We ended 2022 with approximately 42,100 lots under control, which represents a 5.0 year supply of lots based on 2022 homes delivered, including certain lots that we anticipate selling to third parties. This represents a 4% decrease from our approximately 44,000 lots under control at the end of 2021. We opened a record 101 communities and closed 80 communities in 2022, ending the year with a total of 196 communities, compared to 175 at the end of 2021.
Although the timing of opening new communities and closing out existing communities is subject to substantial variation, we expect to grow our community count by approximately 15% by the end of 2023 to 225 communities.
While we believe 2023 will be a very challenging year compared to the past few years of historically strong market conditions, we believe that we are well positioned with a strong balance sheet and backlog to manage through the current economic environment. However, the challenging macroeconomic conditions described above could materially and negatively affect our performance in 2023, particularly when compared to our performance over the past few years.
Future economic and homebuilding industry conditions and the demand for homes are subject to continued uncertainty due to many factors, including the impacts of increased mortgage interest rates, inflation, materials and labor cost increases, supply chain disruptions and labor shortages, and the further impact of these actions on the economy, 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 Fort Myers/Naples, Florida
Minneapolis/St. Paul, Minnesota Austin, Texas
Detroit, Michigan Dallas/Fort Worth, Texas
Houston, Texas
San Antonio, Texas
Charlotte, North Carolina
Raleigh, North Carolina
Nashville, Tennessee
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The following table shows, by segment: revenue; gross margin; selling, general and administrative expense; operating income (loss); interest expense (income); and depreciation and amortization for the years ended December 31, 2022, 2021 and 2020:
Year Ended
(In thousands) 2022 2021 2020
Revenue:
Northern homebuilding $ 1,714,236 $ 1,595,746 $ 1,256,405
Southern homebuilding 2,330,962 2,048,113 1,702,727
Financial services (a)
86,195 102,028 87,013
Total revenue $ 4,131,393 $ 3,745,887 $ 3,046,145
Gross margin:
Northern homebuilding $ 334,300 $ 331,521 $ 232,915
Southern homebuilding (b)
623,347 475,366 356,415
Financial services (a)
86,195 102,028 87,013
Total gross margin (b) (c)
$ 1,043,842 $ 908,915 $ 676,343
Selling, general and administrative expense:
Northern homebuilding $ 116,801 $ 119,563 $ 107,327
Southern homebuilding 171,473 162,705 153,854
Financial services (a)
41,813 39,737 33,618
Corporate 76,304 68,614 62,283
Total selling, general and administrative expense $ 406,391 $ 390,619 $ 357,082
Operating income (loss):
Northern homebuilding $ 217,499 $ 211,958 $ 125,588
Southern homebuilding (b)
451,874 312,661 202,561
Financial services (a)
44,382 62,291 53,395
Less: Corporate selling, general and administrative expense (76,304) (68,614) (62,283)
Total operating income (b) (c)
$ 637,451 $ 518,296 $ 319,261
Interest expense (income):
Northern homebuilding $ (469) $ 76 $ 2,465
Southern homebuilding (1,447) (464) 4,292
Financial services (a)
5,122 3,912 2,927
Corporate (956) (1,368) —
Total interest expense $ 2,250 $ 2,156 $ 9,684
Other income (d)
$ (6) $ (2,046) $ (466)
Loss on early extinguishment of debt (e)
— 9,072 —
Income before income taxes $ 635,207 $ 509,114 $ 310,043
Depreciation and amortization:
Northern homebuilding $ 3,308 $ 3,407 $ 3,342
Southern homebuilding 2,790 3,644 4,468
Financial services 2,178 2,227 3,034
Corporate 8,898 7,637 6,734
Total depreciation and amortization $ 17,174 $ 16,915 $ 17,578
(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) 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).
(c) Total gross margin and total operating income were reduced by $18.4 million of asset impairment charges and deposit write-offs taken during the year ended December 31, 2022 and $8.4 million of asset impairment charges taken during the year ended December 31, 2020.
(d) 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.
(e) 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, 2022, 2021 and 2020:
At December 31, 2022
(In thousands) Northern Southern Corporate, Financial Services and Unallocated Total
Deposits on real estate under option or contract $ 8,138 $ 47,601 $ — $ 55,739
Inventory (a)
1,100,472 1,672,391 — 2,772,863
Investments in joint venture arrangements — 51,554 — 51,554
Other assets 38,265 103,182 (b)
693,320 834,767
Total assets $ 1,146,875 $ 1,874,728 $ 693,320 $ 3,714,923
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 unconsolidated joint ventures 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
(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, 2022, 2021 and 2020:
Year Ended December 31,
(Dollars in thousands) 2022 2021 2020
Northern Region
Homes delivered 3,581 3,592 3,071
New contracts, net 2,747 3,667 3,743
Backlog at end of period 1,056 1,890 1,815
Average sales price of homes delivered $ 478 $ 443 $ 408
Average sales price of homes in backlog $ 523 $ 484 $ 436
Aggregate sales value of homes in backlog $ 552,451 $ 914,130 $ 792,029
Housing revenue $ 1,711,627 $ 1,591,125 $ 1,252,597
Land sale revenue $ 2,609 $ 4,621 $ 3,808
Operating income homes (a)
$ 217,309 $ 210,841 $ 125,410
Operating income land $ 190 $ 1,117 $ 178
Number of average active communities 92 86 93
Number of active communities, end of period 98 90 90
Southern Region
Homes delivered 4,785 5,046 4,638
New contracts, net 3,921 5,417 5,684
Backlog at end of period 2,081 2,945 2,574
Average sales price of homes delivered $ 480 $ 404 $ 364
Average sales price of homes in backlog $ 551 $ 493 $ 406
Aggregate sales value of homes in backlog $ 1,145,719 $ 1,452,743 $ 1,044,878
Housing revenue $ 2,298,800 $ 2,039,344 $ 1,687,365
Land sale revenue $ 32,162 $ 8,769 $ 15,362
Operating income homes (a) (b)
$ 440,329 $ 310,550 $ 201,750
Operating income land $ 11,545 $ 2,111 $ 811
Number of average active communities 86 96 122
Number of active communities, end of period 98 85 112
Total Homebuilding Regions
Homes delivered 8,366 8,638 7,709
New contracts, net 6,668 9,084 9,427
Backlog at end of period 3,137 4,835 4,389
Average sales price of homes delivered $ 479 $ 420 $ 381
Average sales price of homes in backlog $ 541 $ 490 $ 419
Aggregate sales value of homes in backlog $ 1,698,170 $ 2,366,873 $ 1,836,907
Housing revenue $ 4,010,427 $ 3,630,469 $ 2,939,962
Land sale revenue $ 34,771 $ 13,390 $ 19,170
Operating income homes (a) (b) (c)
$ 657,638 $ 521,391 $ 327,160
Operating income land $ 11,735 $ 3,228 $ 989
Number of average active communities 179 183 215
Number of active communities, end of period 196 175 202
(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 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.
(c) Includes $18.4 million of asset impairment charges and deposit write-offs taken during the year ended December 31, 2022 and $8.4 million of asset impairment charges taken during the year ended December 31, 2020.
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Year Ended December 31,
(Dollars in thousands) 2022 2021 2020
Financial Services
Number of loans originated 5,374 6,525 5,888
Value of loans originated $ 2,069,615 $ 2,239,928 $ 1,843,576
Revenue $ 86,195 $ 102,028 $ 87,013
Less: Selling, general and administrative expenses
41,813 39,737 33,618
Less: Interest expense 5,122 3,912 2,927
Income before income taxes $ 39,260 $ 58,379 $ 50,468
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, 2022, 2021 and 2020:
Year Ended December 31,
2022 2021 2020
Northern 11.7 % 7.4 % 9.4 %
Southern 16.1 % 8.1 % 12.4 %
Total cancellation rate 14.3 % 7.8 % 11.2 %
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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) 2022 2021 2020
Housing revenue $ 4,010,427 $ 3,630,469 $ 2,939,962
Housing cost of sales 3,064,515 2,826,810 2,351,621
Housing gross margin 945,912 803,659 588,341
Add: Stucco-related charges (a)
— — 860
Add: Impairment (b)
18,352 — 8,435
Adjusted housing gross margin $ 964,264 $ 803,659 $ 597,636
Housing gross margin percentage 23.6 % 22.1 % 20.0 %
Adjusted housing gross margin percentage 24.0 % 22.1 % 20.3 %
Income before income taxes $ 635,207 $ 509,114 $ 310,043
Add: Stucco-related charges (a)
— — 860
Add: Impairment (b)
18,352 — 8,435
Add: Loss on early extinguishment of debt (c)
— 9,072 —
Adjusted income before income taxes $ 653,559 $ 518,186 $ 319,338
Net income $ 490,662 $ 396,868 $ 239,874
Add: Stucco-related charges - net of tax (a)
— — 654
Add: Impairment - net of tax (b)
13,948 — 6,411
Add: Loss on early extinguishment of debt - net of tax (c)
— 6,985 —
Adjusted net income $ 504,610 $ 403,853 $ 246,939
(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 and deposit write-offs taken during 2022 and asset impairment charges taken during 2020.
(c) 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, 2022 Compared to Year Ended December 31, 2021
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, 2022, homebuilding revenue in our Northern region increased $118.5 million, from $1.60 billion in 2021 to $1.71 billion in 2022. This 7% increase in homebuilding revenue was the result of an 8% increase in the average sales price of homes delivered ($35,000 per home delivered), which was primarily in response to robust consumer demand in 2021 and early 2022 when the majority of our homes delivered during the year were placed under contract, partially offset by a decrease in the number of homes delivered (11 units), due to decreased demand as a result of the macroeconomic conditions described above in our Overview section, difficult comps versus last year, and a $2.0 million decrease in land sale revenue. Operating income in our Northern region increased $5.5 million, from $212.0 million in 2021 to $217.5 million in 2022. The increase in operating income was primarily the result of a $2.7 million increase in our gross margin in addition to a $2.8 million decrease in selling, general, and administrative expense. With respect to our homebuilding gross margin, our housing gross margin improved $3.7 million, due to the increases noted above. Our housing gross margin percentage declined 130 basis points from 20.8% in 2021 to 19.5% in 2022 largely due to increased construction and lot costs, offset partially by the increase in average sales price of homes delivered compared to prior year. Our housing gross margin was unfavorably impacted by $10.4 million of asset impairment charges and deposit write-offs taken in 2022. Exclusive of these charges, our adjusted housing gross margin percentage declined 70 basis points to 20.1%. Our land sale gross margin declined $0.9 million as a result of the mix of lots sold in the current year compared to the prior year and fewer land sales compared to prior year.
Selling, general and administrative expense decreased $2.8 million from $119.6 million in 2021 to $116.8 million in 2022, and improved as a percentage of revenue to 6.8% in 2022 from 7.5% in 2021. The decrease in selling, general and administrative expense was attributable to a $3.8 million decrease in selling expense, due to a $5.8 million decrease in variable selling expenses resulting from decreases in sales commissions produced by the lower number of homes delivered offset, in part, by a $2.0 million increase in non-variable selling expenses primarily related to costs associated with our sales offices and models. The decrease in selling, general and administrative expense was partially offset by a $1.0 million increase in general and administrative expense, which was primarily related to a $1.5 million increase in compensation related expenses as a result of an increase in incentive compensation due to improved results, partially offset by a $0.5 million decrease in miscellaneous expenses.
During 2022, we experienced a 25% decrease in new contracts in our Northern region, from 3,667 in 2021 to 2,747 in 2022. Backlog decreased 44% from 1,890 homes at December 31, 2021 to 1,056 homes at December 31, 2022. The decreases in new contracts and backlog were primarily due to decreased demand as a result of the macroeconomic conditions described above in our Overview section and difficult comps versus last year. Average sales price in backlog increased to $523,000 at December 31, 2022 compared to $484,000 at December 31, 2021. During the twelve months ended December 31, 2022, we opened 34 new communities in our Northern region compared to 40 during 2021. Our monthly absorption rate in our Northern region declined to 2.5 per community in 2022, compared to 3.6 per community in 2021 due to the decline in new contracts noted above.
Southern Region. For the twelve months ended December 31, 2022, homebuilding revenue in our Southern region increased $282.8 million, from $2.05 billion in 2021 to $2.33 billion in 2022. This 14% increase in homebuilding revenue was primarily the result of a 19% increase in the average sales price of homes delivered ($76,000 per home delivered) and a $23.4 million increase in land sale revenue, partially offset by a 5% decrease in the number of homes delivered (261 units) due to decreased demand as a result of the macroeconomic conditions described above in our Overview section, a decrease in our average number of communities and difficult comps versus last year. Operating income in our Southern region increased $139.2 million from $312.7 million in 2021 to $451.9 million in 2022. This increase in operating income was the result of a $148.0 million improvement in our gross margin, offset, in part, by an $8.8 million increase in selling, general, and administrative expense. With respect to our homebuilding gross margin, our housing gross margin improved $138.5 million, due primarily to the increase in the average sales price of homes delivered noted above. Our housing gross margin percentage improved 340 basis points from 23.2% in 2021 to 26.6% in 2022 largely due to the increase in average sales price of homes delivered compared to prior year. Our housing gross margin was unfavorably impacted by $8.0 million of deposit write-offs taken in 2022. Exclusive of these charges, our adjusted housing gross margin percentage improved 380 basis points to 27.0%. Our land sale gross margin improved $9.4 million as a result of the mix of lots sold in the current year compared to the prior year.
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Selling, general and administrative expense increased $8.8 million from $162.7 million in 2021 to $171.5 million in 2022 but declined as a percentage of revenue to 7.4% in 2022 from 7.9% in 2021. The increase in selling, general and administrative expense was attributable to a $12.2 million increase in general and administrative expense, which was primarily related to a $5.2 million increase in compensation related expenses as a result of an increase in incentive compensation due to our strong financial performance during the period, a $4.7 million increase in land-related expenses and a $2.3 million increase in miscellaneous expenses, offset, in part, by a $3.4 million decrease in selling expense. Selling expense declined due to a $2.9 million decrease in variable selling expenses resulting from increases in sales commissions produced by the lower number of homes delivered and a $0.5 million decrease in non-variable selling expenses primarily related to the timing of sales office and model openings and a reduction in marketing costs.
During 2022, we experienced a 28% decrease in new contracts in our Southern region, from 5,417 in 2021 to 3,921 in 2022. Backlog decreased 29% from 2,945 homes at December 31, 2021 to 2,081 homes at December 31, 2022. The decreases in new contracts and backlog were primarily due to decreased demand as a result of the macroeconomic conditions described above in our Overview section, a decrease in our average number of communities, and difficult comps compared to prior year. Average sales price in backlog increased to $551,000 at December 31, 2022 from $493,000 at December 31, 2021. During 2022, we opened 67 communities in our Southern region compared to 32 in 2021. Our monthly absorption rate in our Southern region declined to 3.8 per community in 2022 from 4.7 per community in 2021.
Financial Services. Revenue from our mortgage and title operations decreased $15.8 million, or 16%, from a record $102.0 million for the twelve months ended December 31, 2021 to $86.2 million for the twelve months ended December 31, 2022 as a result of an 18% decrease in the number of loan originations, from 6,525 in 2021 to 5,374 in 2022, and lower margins on loans sold during the period compared to prior year. Partially offsetting this was an increase in the average loan amount from $343,000 in 2021 to $385,000 in 2022.
Our financial service operations ended 2022 with a $17.9 million decrease in operating income compared to 2021, which was primarily due to the decrease in revenue discussed above in addition to a $2.1 million increase in selling, general and administrative expense compared to 2021. The increase in selling, general and administrative expense was attributable to an increase in compensation expense related to our increase in employee headcount as a result of our expansion into new markets.
At December 31, 2022, M/I Financial provided financing services in all of our markets. Approximately 78% of our homes delivered during 2022 were financed through M/I Financial, compared to 84% during 2021. 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 $7.7 million, from $68.6 million in 2021 to $76.3 million in 2022. The increase was primarily due to a $2.8 million increase in compensation expense due to increased headcount during the period, a $1.9 million increase related to costs associated with new information systems and a $3.0 million increase in miscellaneous 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 less than $0.1 million and $0.1 million of equity in income from its LLCs during 2022 and 2021, respectively.
Interest Expense - Net. Interest expense for the Company increased $0.1 million from $2.2 million in the twelve months ended December 31, 2021 to $2.3 million in the twelve months ended December 31, 2022. This increase in interest expense was primarily due to an increase in our average outstanding borrowings resulting in an increase in our weighted average borrowings from $716.7 million in 2021 to $811.0 million in 2022.
Loss on Early Extinguishment of Debt. We recognized a loss on early extinguishment of debt of $9.1 million during 2021 as a result of the write-off of unamortized debt issuance costs and a prepayment premium associated with the redemption of our 2025 Senior Notes.
Income Taxes. Our overall effective tax rate was 22.8% for the year ended December 31, 2022 and 22.0% for the year ended December 31, 2021. The increase in the effective rate for the twelve months ended December 31, 2022 was primarily attributable to decreased tax benefits from energy tax credits and equity compensation (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) 2022 2021
Northern region:
Housing revenue $ 1,711,627 $ 1,591,125
Housing cost of sales 1,377,517 1,260,721
Housing gross margin 334,110 330,404
Add: Impairment (a)
10,405 —
Adjusted housing gross margin $ 344,515 $ 330,404
Housing gross margin percentage 19.5 % 20.8 %
Adjusted housing gross margin percentage 20.1 % 20.8 %
Southern region:
Housing revenue $ 2,298,800 $ 2,039,344
Housing cost of sales 1,686,998 1,566,089
Housing gross margin 611,802 473,255
Add: Impairment (a)
7,946 —
Adjusted housing gross margin $ 619,748 $ 473,255
Housing gross margin percentage 26.6 % 23.2 %
Adjusted housing gross margin percentage 27.0 % 23.2 %
(a) Represents asset impairment charges taken during the respective periods.
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
For a comparison of our results of operations for the fiscal years ended December 31, 2021 and December 31, 2020, 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, 2021, filed with the SEC on February 17, 2022.
LIQUIDITY AND CAPITAL RESOURCES
Overview of Capital Resources and Liquidity
At December 31, 2022, we had $311.5 million of cash, cash equivalents and restricted cash, with $310.6 million of this amount comprised of unrestricted cash and cash equivalents, which represents a $74.5 million increase in unrestricted cash and cash equivalents from December 31, 2021. Our principal uses of cash during 2022 were investment in land and land development, construction of homes, mortgage loan originations, investment in joint ventures, operating expenses, short-term working capital, and debt service requirements, including the repayment of amounts outstanding under our credit facilities, and the repurchase of $55.3 million of our outstanding common shares under our 2021 Share Repurchase Program during the first, second and third quarters of 2022. In order to fund these uses of cash, we used proceeds from home deliveries, the sale of mortgage loans, as well as excess cash balances, borrowings under our credit facilities, and other sources of liquidity.
The Company is a party to three primary credit agreements: (1) the Credit Facility, our $650 million unsecured revolving credit facility, dated July 18, 2013, as amended (the “Credit Facility”), with M/I Homes, Inc. as borrower and guaranteed by the Company’s wholly-owned homebuilding subsidiaries; (2) the MIF Mortgage Warehousing Agreement, our $200 million secured mortgage warehousing agreement (which increased to $275 million from September 19, 2022 to November 13, 2022
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and to $300 million from November 14, 2022 to February 6, 2023), 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.
As of December 31, 2022, 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 $946 million, with $246 million payable within 12 months. Future interest payments associated with these notes payable totaled $198 million as of December 31, 2022, with $32 million payable within 12 months.
As of December 31, 2022, there were no borrowings outstanding and $94.9 million of letters of credit outstanding under our $650 million Credit Facility, leaving $555.1 million available. We expect to continue managing our balance sheet and liquidity carefully in 2023 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 2023 from cash receipts and availability under our credit facilities, as well as excess cash balances.
During the year ended December 31, 2022, we delivered 8,366 homes, started 7,792 homes, and spent $341.1 million on land purchases and $496.2 million on land development.
We are selectively acquiring and developing lots in our markets to replenish and increase our lot supply and are being more selective in investing in land and land development opportunities in response to the current market conditions. We 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, 2022, we had a total of 17,049 lots under contract, with an aggregate purchase price of approximately $803.5 million, to be acquired during the period from 2023 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 2022, we generated $184.1 million of cash in operating activities, compared to using $16.8 million of cash from operating activities in 2021. The cash generated by operating activities in 2022 was primarily a result of net income of $490.7 million, proceeds from the sale of mortgage loans that exceeded mortgage loan originations by $33.5 million and a $34.3 million increase in other liabilities, offset partially by a $348.7 million increase in inventory and $30.7 million decrease in accounts payable and customer deposits. 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.
Investing Cash Flow Activities. During 2022, we used $27.4 million of cash in investing activities, compared to using $51.7 million of cash in investing activities during 2021. This $24.3 million decrease in cash usage was primarily due to a decrease in cash contributions to our joint venture arrangements compared to prior year.
Financing Cash Flow Activities. During 2022, we used $81.5 million of cash in our financing activities, compared to generating $44.1 million of cash during 2021. The cash used in financing activities in 2022 was primarily due to net repayments under our two M/I Financial credit facilities of $20.4 million in addition to the repurchase of $55.3 million of our outstanding common shares during 2022.
On July 28, 2021, the Company announced that its Board of Directors authorized a new 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). On February 17, 2022, the Company announced that its Board of Directors approved an increase to its 2021 Share Repurchase Program by an additional $100 million. During 2022, the Company repurchased 1.2 million common shares with an aggregate purchase price of $55.3 million which was funded with cash on hand. As of December 31, 2022, the Company was authorized to repurchase an additional $93.1 million of outstanding common shares under the 2021 Share Repurchase Program.
The timing and amount of any future 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.
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At December 31, 2022 and December 31, 2021, our ratio of homebuilding debt to capital was 25% and 30%, 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, 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, 2022:
(In thousands) Expiration
Date Outstanding
Balance Available
Amount
Notes payable – homebuilding (a)
(a) $ — $ 555,144
Notes payable – financial services (b)
(b) $ 245,741 $ 2,489
(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 $1.6 billion of availability for additional senior debt at December 31, 2022. As a result, the full $650 million commitment amount of the facility was available, less any borrowings and letters of credit outstanding. There were no borrowings outstanding and $94.9 million of letters of credit outstanding at December 31, 2022, leaving $555.1 million available. The Credit Facility has an expiration date of December 9, 2026.
(b) The available amount is computed in accordance with the borrowing base calculations under the MIF Mortgage Warehousing Agreement and the MIF Mortgage Repurchase Facility, each of which may be increased by pledging additional mortgage collateral, not to exceed the maximum aggregate commitment amount of M/I Financial's warehousing agreements as of December 31, 2022, which was $390 million, which included a temporary increase for the MIF Mortgage Warehouse Agreement applicable through February 6, 2023 (as described below) at which time the maximum aggregate commitment amount under the two agreements reverted to $290 million. The MIF Mortgage Warehousing Agreement has an expiration date of May 26, 2023. M/I Financial entered into an amendment to the MIF Mortgage Repurchase Facility, which extended its term for an additional year to October 23, 2023.
Notes Payable - Homebuilding.
Homebuilding Credit Facility . On December 9, 2022, the company entered into an amendment to the Credit Facility, which, among other things, (1) increased the commitments from lenders to $650 million, (2) extended the maturity to December 9, 2026, (3) increased the accordion feature pursuant to which the maximum borrowing availability may be increased to an aggregate of $800 million, subject to obtaining additional commitments from lenders, (4) increased the sub-facility for letters of credit included in the Credit Facility to $250 million from $150 million, and (5) replaced LIBOR with the secured overnight financing rate (“SOFR”) as an interest rate bench mark (subject to a floor of 0.25%) and permitted the Company to select an index rate for each borrowing from multiple interest rate options, including one, three or six month adjusted term SOFR, plus a margin of 1.75 basis points (subject to adjustment in subsequent quarterly periods based on the Company’s then applicable leverage ratio).
Borrowings under the Credit Facility constitute senior, unsecured indebtedness and availability is subject to, among other things, a borrowing base calculated using various advance rates for different categories of inventory. The Credit Facility also provides for a $250 million sub-facility for letters of credit. The Credit Facility contains various representations, warranties and covenants which require, among other things, that the Company maintain (1) a minimum level of Consolidated Tangible Net Worth of $1.3 billion at December 31, 2022 (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
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unsold housing units, as well as the amount of Investments in Unrestricted Subsidiaries and Joint Ventures (each as defined in the Credit Facility).
The Company’s obligations under the Credit Facility are guaranteed by all of the Company’s subsidiaries, with the exception of subsidiaries that are primarily engaged in the business of mortgage financing, title insurance or similar financial businesses relating to the homebuilding and home sales business, certain subsidiaries that are not 100%-owned by the Company or another subsidiary, and other subsidiaries designated by the Company as Unrestricted Subsidiaries, 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, 2022, 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, 2022:
Financial Covenant Covenant Requirement Actual
(Dollars in millions)
Consolidated Tangible Net Worth ≥ $ 1,317.0 $ 1,980.7
Leverage Ratio ≤ 0.60 0.19
Interest Coverage Ratio ≥ 1.5 to 1.0 22.9 to 1.0
Investments in Unrestricted Subsidiaries and Joint Ventures ≤ $ 594.2 $ 6.0
Unsold Housing Units ≤ 3,087 1,505
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 $200 million, which increased to $275 million from September 19, 2022 to November 13, 2022 and increased to $300 million from November 14, 2022 to February 6, 2023, which were periods of expected increases in the volume of mortgage originations. The MIF Mortgage Warehousing Agreement expires on May 26, 2023. Interest on amounts borrowed under the MIF Mortgage Warehousing Agreement is payable at a per annum rate equal to the one-month BSBY rate (adjusting daily) (subject to a floor of 0.25%) plus a spread of 190 basis points.
As is typical for similar credit facilities in the mortgage origination industry, at closing, the expiration of the MIF Mortgage Warehousing Agreement was set at approximately one year and is under consideration for extension annually by the participating lenders. We expect to extend the MIF Mortgage Warehousing Agreement on or prior to the current expiration date of May 26, 2023, but we cannot provide any assurance that we will be able to obtain such an extension.
The MIF Mortgage Warehousing Agreement is secured by certain mortgage loans originated by M/I Financial that are being “warehoused” prior to their sale to investors. The MIF Mortgage Warehousing Agreement provides for limits with respect to certain loan types that can secure outstanding borrowings. There are currently no guarantors of the MIF Mortgage Warehousing Agreement.
As of December 31, 2022, there was $200.9 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, 2022:
Financial Covenant Covenant Requirement Actual
(Dollars in millions)
Leverage Ratio ≤ 12.0 to 1.0 8.4 to 1.0
Liquidity ≥ $ 10.0 $ 42.4
Adjusted Net Income > $ 0.0 $ 21.7
Tangible Net Worth ≥ $ 20.0 $ 33.9
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 23, 2023. As is typical for similar credit facilities in the mortgage origination industry, at closing, the expiration of the MIF
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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 One-Month Term SOFR (subject to an all-in floor of 2.375% or 2.75% based on the type of loan) plus 150 or 200 basis points depending on loan type. 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, 2022, there was $44.9 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, 2022.
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, 2022, the Company was in compliance with all terms, conditions, and covenants under the indenture.
4.95% Senior Notes. On January 22, 2020, the Company issued $400.0 million aggregate principal amount of 4.95% Senior Notes due 2028. The 2028 Senior Notes contain certain covenants, as more fully described and defined in the indenture governing the 2028 Senior Notes, which limit the ability of the Company and the restricted subsidiaries to, among other things: incur additional indebtedness; make certain payments, including dividends, or repurchase any shares, in an aggregate amount exceeding our “restricted payments basket”; make certain investments; and create or incur certain liens, consolidate or merge with or into other companies, or liquidate or sell or transfer all or substantially all of our assets. These covenants are subject to a number of exceptions and qualifications as described in the indenture governing the 2028 Senior Notes. As of December 31, 2022, 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, 2022, 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
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compliance with the terms of the applicable indenture; (2) all of the Equity Interests (as defined in the applicable indenture) held by M/I Homes, Inc. and the Restricted Subsidiaries (as defined in the applicable Indenture) of such Subsidiary Guarantor have been sold or otherwise disposed of to any person other than M/I Homes, Inc. or a Restricted Subsidiary in a transaction in compliance with the terms of the applicable indenture; (3) the Subsidiary Guarantor is designated an Unrestricted Subsidiary (or otherwise ceases to be a Restricted Subsidiary (including by way of liquidation or merger)) in compliance with the terms of the applicable indenture; (4) M/I Homes, Inc. exercises its legal defeasance option or covenant defeasance option under the applicable indenture; or (5) all obligations under the applicable indenture are discharged in accordance with the terms of the applicable indenture.
The enforceability of the obligations of the Subsidiary Guarantors under their guarantees may be subject to review under applicable federal or state laws relating to fraudulent conveyance or transfer, voidable preference and similar laws affecting the rights of creditors generally. In certain circumstances, a court could void the guarantees, subordinate amounts owing under the guarantees or order other relief detrimental to the holders of the 2030 Senior Notes and the 2028 Senior Notes.
The following tables present summarized financial information on a combined basis for M/I Homes, Inc. and the Subsidiary Guarantors. Transactions between M/I Homes, Inc. and the Subsidiary Guarantors have been eliminated and the summarized financial information does not reflect M/I Homes, Inc.’s or the Subsidiary Guarantors’ investment in, and equity in earnings from, the Non-Guarantor Subsidiaries.
Summarized Balance Sheet Data
(In thousands) December 31, 2022
Assets:
Cash $ 269,071
Investment in joint venture arrangements $ 45,907
Amounts due from Non-Guarantor Subsidiaries $ 15,772
Total assets $ 3,379,932
Liabilities and Shareholders’ Equity:
Total liabilities $ 1,359,951
Shareholders’ equity $ 2,019,981
Summarized Statement of Income Data
Year Ended
(In thousands) December 31, 2022
Revenues $ 4,045,198
Land and housing costs $ 3,069,199
Selling, general and administrative expense $ 363,393
Income before income taxes $ 597,126
Net income $ 459,059
Weighted Average Borrowings. In 2022 and 2021, our weighted average borrowings outstanding were $811.0 million and $716.7 million, respectively, with a weighted average interest rate of 4.96% and 5.55%, respectively. The increase in our weighted average borrowings related to increased borrowings under our two M/I Financial credit facilities during 2022 compared to 2021 due to an increase in average loan amounts in 2022. The decrease in our weighted average borrowing rate was due to lower interest rates on our credit facilities in 2022 compared to the prior year.
At both December 31, 2022 and December 31, 2021, we had no borrowings outstanding under the Credit Facility. During the twelve months ended December 31, 2022, the average daily amount outstanding under the Credit Facility was $9.0 million and the maximum amount outstanding under the Credit Facility was $82.5 million which occurred during September. 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. Based on our currently anticipated spending on home construction, overhead expenses, share repurchases and land acquisition and development in 2023, offset by expected cash receipts from home deliveries and other sources, we may borrow under the Credit Facility during 2023, but do not expect the peak amount outstanding to exceed approximately $100 million. The actual amount borrowed in 2023 (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
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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 $94.9 million of letters of credit issued and outstanding under the Credit Facility at December 31, 2022. During 2022, the average daily amount of letters of credit outstanding under the Credit Facility was $92.6 million and the maximum amount of letters of credit outstanding under the Credit Facility was $107.8 million.
At December 31, 2022, M/I Financial had $200.9 million outstanding under the MIF Mortgage Warehousing Agreement. During 2022, the average daily amount outstanding under the MIF Mortgage Warehousing Agreement was $60.4 million and the maximum amount outstanding was $200.9 million, which occurred during December, while the temporary increase provision was in effect and the maximum borrowing availability was $300 million.
At December 31, 2022, M/I Financial had $44.9 million outstanding under the MIF Mortgage Repurchase Facility. During 2022, the average daily amount outstanding under the MIF Mortgage Repurchase Facility was $40.5 million and the maximum amount outstanding was $80.4 million, which occurred during October.
Universal Shelf Registration. In June 2022, the Company filed a universal shelf registration statement with the SEC, which registration statement became effective upon filing and will expire in June 2025. Pursuant to the registration statement, the Company may, from time to time, offer debt securities, common shares, preferred shares, depositary shares, warrants to purchase debt securities, common shares, preferred shares, depositary shares or units of two or more of those securities, rights to purchase debt securities, common shares, preferred shares or depositary shares, stock purchase contracts and units. The timing and amount of offerings, if any, will depend on market and general business conditions.
INTEREST RATES AND INFLATION
Our business is significantly affected by general economic conditions within the United States and, particularly, by the impact of interest rates and inflation. The annual rate of inflation in the United States was 6.5% in December 2022, as measured by the Consumer Price Index (CPI), down slightly from 9.1% in June 2022 which was the highest inflation rate we have experienced in 40 years. As a result of the high inflation rates during 2022, we have experienced an increase in the costs of land, materials and labor that we have been able to pass along to the consumer. However, inflation has also reduced the purchasing power of potential homebuyers and has negatively impacted their ability and desire to buy a home and our ability to pass along our increased costs to our homebuyers.
Beginning in the second half of 2022, the pace of sales across the homebuilding industry declined significantly from the unprecedented levels experienced over the previous two years as a result of the sharp increase in mortgage interest rates from approximately 3% in December 2021 to around 6.5% at the end of 2022, the highest rates in over a decade, as well as significant inflation in the broader economy, and the substantial rise in home prices. These macroeconomic trends have pressured housing affordability, negatively impacted homebuyer sentiment and impacted the costs of financing land development activities and housing construction. The higher mortgage interest rates and the high rate of inflation are making it more difficult for homebuyers to qualify for mortgages or to obtain mortgages at interest rates that are acceptable to them. Rising interest rates, as well as increased materials and labor costs, can also reduce gross margins.