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 151,400 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 “Special Note of Caution Regarding 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, are 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, 2023, we utilized discount rates ranging from 13% to 16% in our valuations. The discount rate used in determining each asset’s estimated fair value reflects the inherent risks associated with the related estimated cash flow stream, as well as current risk-free rates available in the market and estimated market risk premiums.
Our quarterly assessments reflect management’s best estimates. Due to the inherent uncertainties in management’s estimates and uncertainties related to our operations and our industry as a whole as further discussed in “Item 1A. Risk Factors” in Part I of this Annual Report on Form 10-K, we are unable to determine at this time if and to what extent future impairments will occur. Additionally, due to the volume of possible outcomes that can be generated from changes in the various model inputs for each community, we do not believe it is possible to create a sensitivity analysis that can provide meaningful information for the users of our financial statements.
Warranty Reserves. We record warranty reserves to cover our exposure to the costs for materials and labor not expected to be covered by our subcontractors to the extent they relate to warranty-type claims. Warranty reserves are established by charging cost of sales and crediting a warranty reserve for each home delivered. The warranty reserves for the Company’s Home Builder’s Limited Warranty (“HBLW”) are established as a percentage of average sales price and adjusted based on historical payment patterns determined, generally, by geographic area and recent trends. Factors that are given consideration in determining the HBLW reserves include: (1) the historical range of amounts paid per average sales price on a home; (2) type and mix of amenity packages added to the home; (3) any warranty expenditures not considered to be normal and recurring; (4) timing of payments; (5) improvements in quality of construction expected to impact future warranty expenditures; and (6) conditions that may affect certain projects and require a different percentage of average sales price for those specific projects. Changes in estimates for warranties occur due to changes in the historical payment experience and differences between the actual payment pattern experienced during the period and the historical payment pattern used in our evaluation of the warranty reserve balance at the end of each quarter. Actual future warranty costs could differ from our current estimated amount.
Our warranty reserves for our 30-year (offered on all homes sold after April 25, 1998 and on or before December 1, 2015 in all of our markets except our Texas markets), 15-year (offered on all homes sold after December 1, 2015 and on or before December 31, 2021 in all of our markets except our Texas markets) and 10-year (offered on all homes sold in our Texas markets and in all of our markets beginning January 1, 2022) transferable structural warranty programs are established on a per-unit basis. While the structural warranty reserve is recorded as each house is delivered, the sufficiency of the structural warranty per unit charge and total reserve is reevaluated on an annual basis, with the assistance of an actuary, using our own historical data and trends, industry-wide historical data and trends, and other project specific factors. The reserves are also evaluated quarterly and adjusted if we encounter activity that is inconsistent with the historical experience used in the annual analysis. These reserves are subject to variability due to uncertainties regarding structural defect claims for products we build, the markets in which we build, claim settlement history, insurance and legal interpretations, among other factors.
Our warranty reserve amounts are based upon historical experience and geographic location. While we believe that our warranty reserves are sufficient to cover our projected costs, there can be no assurances that historical data and trends will accurately predict our actual warranty costs. See Note 1 and Note 8 to our Consolidated Financial Statements for additional information related to our warranty reserves.
RESULTS OF OPERATIONS
Overview
In 2023, we achieved our second-highest revenue, income before income taxes and net income in Company history despite the significant headwinds the housing industry faced entering the year, including high mortgage interest rates, inflationary pressures and an uncertain economy. Our new contracts for 2023 increased 20% compared to 2022 as we experienced improvements in homebuyer demand as a result of the limited supply of resale and new home inventory and potential homebuyers adjusting to the interest rate environment compared to the hesitation that appeared to exist in the second half of 2022. We also had very strong cash flow and liquidity and ended the year with low leverage. In addition, during 2023, supply chain disruptions eased leading to improved construction cycle times, both of which helped sustain our gross margin at 25.3%, the same as last year. Our revenue declined 2% while our homes delivered decreased 3% in 2023 compared to 2022. Income before income taxes and net income decreased 4% and 5%, respectively, from prior year’s record levels.
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We achieved the following results during the year ended December 31, 2023 in comparison to the year ended December 31, 2022:
• New contracts increased 20% to 7,977
• Average price of homes delivered increased 1% to $483,000
• Absorption pace of sales per community improved to 3.3 per month
• Average community count increased 9% to 213 at the end of 2023
• Shareholders’ equity increased 22% to $2.5 billion, an all-time record high for our Company
• Book value per common share increased to a record high $91 per share
• Homebuilding debt to capital ratio improved to 22%
In addition to the results described above, our financial services operations achieved a $4.3 million increase in operating income in 2023 compared to 2022, benefiting from higher margins and an increase in the average loan amount.
Our company-wide absorption pace of sales per community in 2023 improved to 3.3 per month compared to 3.1 per month in 2022 as a result of our 20% increase in new contracts during 2023 compared to prior year, partially offset by a smaller increase in our average community count from 179 at the end of 2022 to 202 at the end of 2023. We plan to open additional new communities during 2024, increasing our average community count by approximately 10% compared to 2023.
Income before income taxes for the twelve months ended December 31, 2023 decreased 4% from $635.2 million for the year ended December 31, 2022 to $607.3 million for the year ended December 31, 2023. In 2023, we achieved net income of $465.4 million, or $16.21 per diluted share, compared to net income of $490.7 million, or $17.24 per diluted share in 2022. Our effective tax rate was 23.4% in 2023 compared to 22.8% in 2022.
In 2023, we recorded total revenue of $4.03 billion, of which $3.91 billion was from homes delivered, $25.3 million was from land sales, and $93.8 million was from our financial services operations. Revenue from homes delivered decreased 2% from 2022 driven primarily by a 3% decrease in the number of homes delivered in 2023 (254 units), offset partially by a 1% increase in the average sales price of homes delivered ($4,000 per home delivered). Revenue from land sales decreased $9.5 million from 2022 due primarily to fewer land sales in the current year compared to the prior year. Revenue from our financial services segment increased 9% to $93.8 million in 2023 as a result of an increase in loans closed and sold during the year, in addition to higher margins on loans sold during the period compared to the prior year.
Total gross margin (total revenue less total land and housing costs) decreased $24.9 million in 2023 compared to 2022 as a result of a $32.5 million decline in the gross margin of our homebuilding operations (the sum of housing gross margin and land gross margin), offset partially by a $7.6 million improvement in the gross margin of our financial services operations. With respect to our homebuilding gross margin, our gross margin on homes delivered (housing gross margin) declined $24.2 million, due to the 3% decrease in the number of homes delivered, offset partially by the 1% increase in the average sales price of homes delivered ($4,000 per home delivered) compared to prior year. Our housing gross margin percentage declined 10 basis points from 23.6% in the prior year to 23.5% in 2023. Our gross margin on land sales (land gross margin) declined $8.4 million in 2023 compared to 2022 as a result of fewer land sales and the mix of lots sold in the current year compared to the prior year. The gross margin of our financial services operations, however, improved by $7.6 million in 2023 compared to 2022 as a result of an increase in the number of loan originations, higher margins on loans sold, and an increase in the average loan amount during 2023 compared to prior year.
We opened 76 new communities during 2023, our second highest number in Company history. 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 2023, selling, general and administrative expense increased $25.3 million, and increased as a percentage of revenue to 10.7% in 2023 from 9.8% in 2022. Selling expense increased $17.3 million from 2022 and increased as a percentage of revenue to 5.2% in 2023 from 4.6% in 2022. Variable selling expense for sales commissions contributed $13.3 million to the increase due to the increase in the average sales price of homes delivered as well as higher external sales commission rates paid during the period compared to prior year. Non-variable selling expense increased $4.0 million primarily related to increased costs associated with our sales offices and models due to our increased community count. General and administrative expense increased $8.0 million compared to 2022 and also increased as a percentage of revenue from 5.2% in 2022 to 5.5% in 2023. The dollar increase in general and administrative expense was primarily due to an $8.9 million increase in compensation-related expenses and a $1.1 million increase in land-related costs, offset partially by a $2.0 million decrease in miscellaneous expenses.
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Outlook
Housing market conditions stabilized during 2023 compared to the second half of 2022 with interest rates leveling off late in 2023. Future homebuyer demand remains subject to uncertainty due to various macroeconomic conditions, including labor and material costs and availability, interest rates, inflation, and the economic concerns of our potential homebuyers. The extent to which these factors will impact our business is unpredictable. However, we believe that we are well positioned to manage through these economic conditions with our affordable product offerings, land position and planned new community openings. We remain sensitive to potential changes in market conditions, and continue to focus on controlling overhead leverage, carefully managing our investment in land and land development spending and selectively offering incentives for closing cost assistance or mortgage rate buydowns. Our strong balance sheet and liquidity position should also provide us with flexibility through changing economic conditions. However, we cannot provide any assurances that the strategic business objectives listed below will remain successful, and we may need to adjust elements of our strategy to effectively address evolving market conditions.
We believe that the homebuilding industry will continue to benefit over the long term from a continued undersupply of available homes, positive consumer demographics, and increasing rent prices.
We expect to continue to emphasize the following strategic business objectives in 2024:
• managing our land spend and inventory levels;
• improving our construction cycle times;
• opening new communities;
• managing overhead spend;
• maintaining a strong balance sheet and liquidity levels; and
• emphasizing customer service, product quality and design, and premier locations.
During 2023, we invested $343.5 million in land acquisitions and $512.1 million in land development. We invested more in land development than in land acquisitions in order to finish lots needed to start homes and allow us to open new communities. We continue to closely review all of our land acquisition and land development spending and monitor our ongoing pace of home sales and deliveries, and we will adjust our land and investment spend accordingly.
We ended 2023 with approximately 45,700 lots under control, which represents a 5.6 year supply of lots based on 2023 homes delivered, including certain lots that we anticipate selling to third parties. This represents a 9% increase from our approximately 42,100 lots under control at the end of 2022.
We opened 76 communities and closed 59 communities in 2023, ending the year with a total of 213 communities, compared to 196 at the end of 2022. Although the timing of opening new communities and closing out existing communities is subject to substantial variation, we expect to grow our average community count by approximately 10% by the end of 2024.
We believe that we are well positioned with a strong balance sheet to manage through the current economic environment. However, the challenging macroeconomic conditions described above could materially and negatively affect our performance in 2024, particularly when compared to our performance over the past few years. As a result, our past performance may not be indicative of future results.
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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 (income) expense; and depreciation and amortization for the years ended December 31, 2023, 2022 and 2021:
Year Ended
(In thousands) 2023 2022 2021
Revenue:
Northern homebuilding $ 1,523,943 $ 1,714,236 $ 1,595,746
Southern homebuilding 2,415,730 2,330,962 2,048,113
Financial services (a)
93,829 86,195 102,028
Total revenue $ 4,033,502 $ 4,131,393 $ 3,745,887
Gross margin:
Northern homebuilding $ 294,994 $ 334,300 $ 331,521
Southern homebuilding
630,106 623,347 475,366
Financial services (a)
93,829 86,195 102,028
Total gross margin
$ 1,018,929 $ 1,043,842 $ 908,915
Selling, general and administrative expense:
Northern homebuilding $ 118,674 $ 116,801 $ 119,563
Southern homebuilding 189,938 171,473 162,705
Financial services (a)
45,115 41,813 39,737
Corporate 77,980 76,304 68,614
Total selling, general and administrative expense $ 431,707 $ 406,391 $ 390,619
Operating income (loss):
Northern homebuilding $ 176,320 $ 217,499 $ 211,958
Southern homebuilding
440,168 451,874 312,661
Financial services (a)
48,714 44,382 62,291
Less: Corporate selling, general and administrative expense (77,980) (76,304) (68,614)
Total operating income
$ 587,222 $ 637,451 $ 518,296
Interest (income) expense - net:
Northern homebuilding $ (186) $ (469) $ 76
Southern homebuilding (1,703) (1,447) (464)
Financial services (a)
10,360 5,122 3,912
Corporate (28,493) (956) (1,368)
Total interest (income) expense - net
$ (20,022) $ 2,250 $ 2,156
Other income (b)
$ (33) $ (6) $ (2,046)
Loss on early extinguishment of debt (c)
— — 9,072
Income before income taxes $ 607,277 $ 635,207 $ 509,114
Depreciation and amortization:
Northern homebuilding $ 3,673 $ 3,308 $ 3,407
Southern homebuilding 2,965 2,790 3,644
Financial services 810 2,178 2,227
Corporate 8,343 8,898 7,637
Total depreciation and amortization $ 15,791 $ 17,174 $ 16,915
(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) 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.
(c) 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, 2023, 2022 and 2021:
At December 31, 2023
(In thousands) Northern Southern Corporate, Financial Services and Unallocated Total
Deposits on real estate under option or contract $ 8,990 $ 42,618 $ — $ 51,608
Inventory (a)
1,016,982 1,728,561 — 2,745,543
Investments in joint venture arrangements — 44,011 — 44,011
Other assets 37,171 104,306 (b)
1,039,801 1,181,278
Total assets $ 1,063,143 $ 1,919,496 $ 1,039,801 $ 4,022,440
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 unconsolidated joint ventures — 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
(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, 2023, 2022 and 2021:
Year Ended December 31,
(Dollars in thousands) 2023 2022 2021
Northern Region
Homes delivered 3,169 3,581 3,592
New contracts, net 3,361 2,747 3,667
Backlog at end of period 1,248 1,056 1,890
Average sales price of homes delivered $ 479 $ 478 $ 443
Average sales price of homes in backlog $ 531 $ 523 $ 484
Aggregate sales value of homes in backlog $ 663,180 $ 552,451 $ 914,130
Housing revenue $ 1,519,488 $ 1,711,627 $ 1,591,125
Land sale revenue $ 4,455 $ 2,609 $ 4,621
Operating income homes (a)
$ 176,074 $ 217,309 $ 210,841
Operating income land $ 246 $ 190 $ 1,117
Number of average active communities 101 92 86
Number of active communities, end of period 102 98 90
Southern Region
Homes delivered 4,943 4,785 5,046
New contracts, net 4,616 3,921 5,417
Backlog at end of period 1,754 2,081 2,945
Average sales price of homes delivered $ 485 $ 480 $ 404
Average sales price of homes in backlog $ 520 $ 551 $ 493
Aggregate sales value of homes in backlog $ 912,463 $ 1,145,719 $ 1,452,743
Housing revenue $ 2,394,884 $ 2,298,800 $ 2,039,344
Land sale revenue $ 20,846 $ 32,162 $ 8,769
Operating income homes (a)
$ 437,054 $ 440,329 $ 310,550
Operating income land $ 3,114 $ 11,545 $ 2,111
Number of average active communities 101 86 96
Number of active communities, end of period 111 98 85
Total Homebuilding Regions
Homes delivered 8,112 8,366 8,638
New contracts, net 7,977 6,668 9,084
Backlog at end of period 3,002 3,137 4,835
Average sales price of homes delivered $ 483 $ 479 $ 420
Average sales price of homes in backlog $ 525 $ 541 $ 490
Aggregate sales value of homes in backlog $ 1,575,643 $ 1,698,170 $ 2,366,873
Housing revenue $ 3,914,372 $ 4,010,427 $ 3,630,469
Land sale revenue $ 25,301 $ 34,771 $ 13,390
Operating income homes (a)
$ 613,128 $ 657,638 $ 521,391
Operating income land $ 3,360 $ 11,735 $ 3,228
Number of average active communities 202 179 183
Number of active communities, end of period 213 196 175
(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.
Year Ended December 31,
(Dollars in thousands) 2023 2022 2021
Financial Services
Number of loans originated 5,395 5,374 6,525
Value of loans originated $ 2,118,884 $ 2,069,615 $ 2,239,928
Revenue $ 93,829 $ 86,195 $ 102,028
Less: Selling, general and administrative expenses
45,115 41,813 39,737
Less: Interest expense 10,360 5,122 3,912
Income before income taxes $ 38,354 $ 39,260 $ 58,379
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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, 2023, 2022 and 2021:
Year Ended December 31,
2023 2022 2021
Northern 10.5 % 11.7 % 7.4 %
Southern 12.1 % 16.1 % 8.1 %
Total cancellation rate 11.4 % 14.3 % 7.8 %
Year Over Year Comparisons
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
Northern Region. During the twelve months ended December 31, 2023, homebuilding revenue in our Northern region decreased $190.3 million, from $1.71 billion in 2022 to $1.52 billion in 2023. This 11% decrease in homebuilding revenue was the result of a 12% decrease in the number of homes delivered (412 units), primarily attributable to the lower backlog at the beginning of 2023 caused by the slowdown in demand that began in the latter half of 2022 in connection with the higher interest rate environment, offset partially by a $1.8 million increase in land sale revenue and a slight increase in the average sales price of homes delivered ($1,000 per home delivered). Operating income in our Northern region decreased $41.2 million, from $217.5 million in 2022 to $176.3 million in 2023. The decrease in operating income was primarily the result of a $39.3 million decrease in our gross margin in addition to a $1.9 million increase in selling, general, and administrative expense. With respect to our homebuilding gross margin, our housing gross margin declined $39.4 million, and our housing gross margin percentage declined 10 basis points from 19.5% in 2022 to 19.4% in 2023. The decline in our housing gross margin was primarily due to the mix of homes being delivered, the decrease in the number of homes delivered, and increased costs related to incentives offered, including mortgage interest rate buydowns and closing cost assistance. Our land sale gross margin improved $0.1 million as a result of more land sales in 2023 as well as due to the mix of lots sold in the current year compared to the prior year.
Selling, general and administrative expense increased $1.9 million from $116.8 million in 2022 to $118.7 million in 2023 and increased as a percentage of revenue to 7.8% in 2023 from 6.8% in 2022. The increase in selling, general and administrative expense was attributable to a $1.7 million increase in selling expense, due to a $1.2 million increase in variable selling expenses resulting from an increase in realtor commissions and a $0.5 million increase in non-variable selling expenses primarily related to costs associated with our sales offices and models. The increase in selling, general and administrative expense was also attributable to a $0.2 million increase in general and administrative expense, which was primarily related to an increase in land-related expenses.
During 2023, we experienced a 22% increase in new contracts in our Northern region, from 2,747 in 2022 to 3,361 in 2023. Backlog increased 18% from 1,056 homes at December 31, 2022 to 1,248 homes at December 31, 2023. The increases in new contracts and backlog were primarily due to increased demand as a result of the increase in our average number of communities to 101 communities compared to 92 communities in the prior year and improved absorption rate. Average sales price in backlog increased to $531,000 at December 31, 2023 compared to $523,000 at December 31, 2022 primarily due to the mix of homes being sold. During the twelve months ended December 31, 2023, we opened 33 new communities in our Northern region compared to 34 during 2022. Our monthly absorption rate in our Northern region improved to 2.8 per community in 2023 compared to 2.5 per community in 2022 as a result of the increase in the number of new contracts during the period compared to prior year, offset, in part, by a smaller increase in the number of average active communities.
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Southern Region. For the twelve months ended December 31, 2023, homebuilding revenue in our Southern region increased $84.8 million, from $2.33 billion in 2022 to $2.42 billion in 2023. This 4% increase in homebuilding revenue was primarily the result of a 3% increase in the number of homes delivered (158 units) due to increased availability of inventory homes, improved construction cycle times on our backlog homes and a 1% increase in the average sales price of homes delivered ($5,000 per home delivered) primarily due to the mix of homes delivered, partially offset by an $11.3 million decrease in land sale revenue. Operating income in our Southern region decreased $11.7 million from $451.9 million in 2022 to $440.2 million in 2023. This decrease in operating income was the result of an $18.4 million increase in selling, general, and administrative expense, offset, in part, by a $6.7 million improvement in our gross margin. With respect to our homebuilding gross margin, our housing gross margin improved $15.2 million, due primarily to the increase in the average sales price of homes delivered and the increase in the number of homes delivered during the period, offset partially by increased construction and lot costs. Our housing gross margin percentage declined 40 basis points, however, from 26.6% in 2022 to 26.2% in 2023 primarily due to increased costs related to incentives offered, including mortgage interest rate buydowns and closing cost assistance, offset partially by the increase in average sales price of homes delivered compared to prior year. Our land sale gross margin declined $8.4 million as a result of fewer land sales in 2023 compared to 2022 as well as due to the mix of lots sold in the current year compared to the prior year.
Selling, general and administrative expense increased $18.4 million from $171.5 million in 2022 to $189.9 million in 2023 and increased as a percentage of revenue to 7.9% in 2023 from 7.4% in 2022. The increase in selling, general and administrative expense was attributable to a $3.3 million increase in general and administrative expense, which was primarily related to a $4.2 million increase in compensation related expenses as a result of an increase in incentive compensation due to our strong financial performance during the period and a $0.4 million increase in land-related expenses, partially offset by a $1.3 million decrease in miscellaneous expenses. Selling expense increased $15.2 million due to a $12.1 million increase in variable selling expenses resulting from increases in realtor commissions and a $3.1 million increase in non-variable selling expenses primarily attributable to costs related to our sales offices and models due to our increased community count.
During 2023, we experienced an 18% increase in new contracts in our Southern region, from 3,921 in 2022 to 4,616 in 2023, which was primarily due to an increase in our average number of communities to 101 communities compared to 86 communities in the prior year. Backlog decreased 16% from 2,081 homes at December 31, 2022 to 1,754 homes at December 31, 2023. The decrease in backlog was primarily due to improved construction cycle times allowing us to deliver homes in backlog at a faster rate compared to last year. Average sales price in backlog decreased to $520,000 at December 31, 2023 from $551,000 at December 31, 2022 primarily due to the mix of homes delivered. During 2023, we opened 43 communities in our Southern region compared to 67 in 2022. The decline in the number of new communities opened primarily related to our decision to delay land purchases that were scheduled to occur in late 2022 and early 2023 due to the declining market demand for new homes that began in the second half of 2022 along with extended timelines related to utility availability, which pushed community openings into 2024. Our monthly absorption rate in our Southern region remained flat at 3.8 per community in both 2023 and 2022.
Financial Services. Revenue from our mortgage and title operations increased $7.6 million, or 9%, from a $86.2 million for the twelve months ended December 31, 2022 to $93.8 million for the twelve months ended December 31, 2023 as a result of an increase in the number of loan originations, from 5,374 in 2022 to 5,395 in 2023 and an increase in the average loan amount from $385,000 in 2022 to $393,000 in 2023.
Our financial service operations ended 2023 with a $4.3 million increase in operating income compared to 2022, which was primarily due to the increase in revenue discussed above, partially offset by a $3.3 million increase in selling, general and administrative expense compared to 2022. The increase in selling, general and administrative expense was attributable to a $1.1 million increase in compensation expense related to our improved results during the period, a $0.6 million increase in indemnifications, a $0.9 million increase in appraisal costs, and a $0.7 million increase in miscellaneous expenses.
At December 31, 2023, M/I Financial provided financing services in all of our markets. Approximately 83% of our homes delivered during 2023 were financed through M/I Financial, compared to 78% during 2022. 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 $1.7 million, from $76.3 million in 2022 to $78.0 million in 2023. The increase was primarily due to a $4.2 million increase in compensation expense primarily due to our strong financial performance during the period, partially offset by a $0.8 million decrease related to costs associated with new information systems and a $1.7 million decrease in miscellaneous expenses.
Other income. Other income for 2023 and 2022 includes 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
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purpose entity is established (“LLCs”) with the other partners. The Company earned less than $0.1 million of equity in income from its LLCs during both 2023 and 2022.
Interest (Income) Expense - net. The Company earned $20.0 million of interest income - net in the twelve months ended December 31, 2023 compared to incurring $2.3 million of interest expense - net in the twelve months ended December 31, 2022. This was primarily due to a higher average cash balance on hand compared to prior year.
Income Taxes. Our overall effective tax rate was 23.4% for the year ended December 31, 2023 and 22.8% for the year ended December 31, 2022. The increase in the effective rate for the twelve months ended December 31, 2023 was primarily attributable to decreased tax benefits from energy tax credits offset by increased tax benefits from equity compensation (see Note 14 to our Consolidated Financial Statements for more information).
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
For a comparison of our results of operations for the fiscal years ended December 31, 2022 and December 31, 2021, 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, 2022, filed with the SEC on February 17, 2023.
LIQUIDITY AND CAPITAL RESOURCES
Overview of Capital Resources and Liquidity
At December 31, 2023, we had $732.8 million of cash, cash equivalents and restricted cash, with $732.6 million of this amount comprised of unrestricted cash and cash equivalents, which represents a $422.0 million increase in unrestricted cash and cash equivalents from December 31, 2022. The increase in cash is primarily due to 2023 net income, home deliveries, fewer homes under construction compared to prior year, and the timing of land spend compared to prior year. Our principal uses of cash during 2023 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 $65.3 million of our outstanding common shares under our 2021 Share Repurchase Program (as defined below) during 2023. In order to fund these uses of cash, we used proceeds from home deliveries, the sale of mortgage loans, the sale of mortgage servicing rights, excess cash balances, borrowings under our credit facilities, and other sources of liquidity.
The Company is a party to two primary credit agreements: (1) a $650 million unsecured revolving credit facility, dated July 18, 2013, as amended (the “Credit Facility”), with M/I Homes, Inc. as borrower and guaranteed by the Company’s wholly-owned homebuilding subsidiaries and (2) a $300 million (subject to increases and decreases during certain periods) mortgage repurchase agreement, dated October 24, 2023, with M/I Financial as borrower (the “MIF Mortgage Repurchase Facility”).
As of December 31, 2023, we had outstanding notes payable (consisting primarily of notes payable for our financial services operations, the 2030 Senior Notes and the 2028 Senior Notes) with varying maturities in an aggregate principal amount of $866 million, with $166 million payable within 12 months. Future interest payments associated with these notes payable totaled $166 million as of December 31, 2023, with $32 million payable within 12 months.
As of December 31, 2023, there were no borrowings outstanding and $70.7 million of letters of credit outstanding under our Credit Facility, leaving $579.3 million available. We expect to continue managing our balance sheet and liquidity carefully in 2024 by managing our spending on land acquisition and development and construction of inventory homes, as well as overhead expenditures, relative to our ongoing volume of home deliveries, and we expect to meet our current and anticipated cash requirements in 2024 from cash receipts, excess cash balances and availability under our credit facilities.
During the year ended December 31, 2023, we delivered 8,112 homes, started 7,956 homes, ended the year with 4,375 homes under construction compared to 4,522 at the end of last year, and spent $343.5 million on land purchases and $512.1 million on land development.
We are actively acquiring and developing lots in our markets to replenish our lot supply and will continue to monitor market conditions and our pace of home sales and deliveries and adjust our land spending accordingly. Pursuant to our land option agreements, as of December 31, 2023, we had a total of 21,286 lots under contract, with an aggregate purchase price of approximately $1.1 billion, to be acquired from 2024 through 2030.
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Our off-balance sheet arrangements relating to our homebuilding operations include joint venture arrangements, land option agreements, guarantees and indemnifications associated with acquiring and developing land, and the issuance of letters of credit and completion bonds. We use these arrangements to secure the most desirable lots on which to build homes for our homebuyers in a manner that we believe reduces the overall risk to the Company. See Note 6 to our Consolidated Financial Statements for more information regarding these arrangements.
Operating Cash Flow Activities . During 2023, we generated $552.1 million of cash in operating activities, compared to generating $184.1 million of cash from operating activities in 2022. The cash generated by operating activities in 2023 was primarily a result of net income of $465.4 million, proceeds from the sale of mortgage loans that exceeded mortgage loan originations by $72.9 million and a $46.7 million decrease in inventory, offset partially by a $35.2 million decrease in other liabilities and $31.9 million decrease in accounts payable and customer deposits. 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.
Investing Cash Flow Activities. During 2023, we used $18.6 million of cash in investing activities, compared to using $27.4 million of cash in investing activities during 2022. This $8.7 million decrease in cash usage was primarily due to $10.7 million of proceeds from the sale of a portion of our mortgage servicing rights (which occurred during the second quarter of 2023), offset, in part, by a $3.4 million decrease in cash contributions to our joint venture arrangements compared to prior year. The cash used in investing activities during 2022 was primarily a result of an increase in our investment in joint venture arrangements.
Financing Cash Flow Activities. During 2023, we used $112.2 million of cash in financing activities, compared to using $81.5 million of cash in financing activities during 2022. The cash used in financing activities in 2023 was primarily due to repayments of $79.9 million (net of proceeds from borrowings) under our three then-outstanding M/I Financial credit facilities and the repurchase of $65.3 million of our outstanding common shares during 2023, offset, in part, by $33.8 million in proceeds from the exercise of stock options during 2023.
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 (the “2021 Share Repurchase Program”). On February 17, 2022, the Company announced that its Board of Directors approved a $100 million increase to its 2021 Share Repurchase Program. On November 15, 2023, the Company announced that its Board of Directors approved an additional increase of $100 million, for a total of $300 million authorized for repurchases under the 2021 Share Repurchase Program. During 2023, the Company repurchased 0.7 million outstanding common shares for an aggregate purchase price of $65.3 million under the 2021 Share Repurchase Program which was funded with cash on hand. As of December 31, 2023, the Company is authorized to repurchase an additional $127.8 million of outstanding common shares under the 2021 Share Repurchase Program (see Note 16 to our Consolidated Financial Statements).
Based on current market conditions, expected capital needs and availability, and the current market price of the Company’s common shares, we expect to continue repurchasing shares during 2024. The timing and amount of any future purchases under the 2021 Share Repurchase Program will be based on a variety of factors, including the market price of the Company’s common shares, business considerations, general market and economic conditions and legal requirements.
At December 31, 2023 and December 31, 2022, our ratio of homebuilding debt to capital was 22% and 25%, respectively, calculated as the carrying value of our outstanding homebuilding debt (which consists of borrowings under our Credit Facility, our 2030 Senior Notes and our 2028 Senior Notes) divided by the sum of the carrying value of our outstanding homebuilding debt plus shareholders’ equity. We believe that this ratio provides useful information for understanding our financial position and the leverage employed in our operations, and for comparing us with other homebuilders.
We fund our operations with cash flows from operating activities, including proceeds from home deliveries, land sales and the sale of mortgage loans. We believe that these sources of cash, along with our balance of unrestricted cash and borrowings available under our credit facilities, will be sufficient to fund our currently anticipated working capital needs, investment in land and land development, construction of homes, operating expenses, planned capital spending, and debt service requirements for at least the next twelve months. In addition, we routinely monitor current and anticipated operational and debt service requirements, financial market conditions, and credit relationships, and we may choose to seek additional capital by issuing new debt and/or equity securities or engaging in other financial transactions to strengthen our liquidity or our long-term capital structure. The financing needs of our homebuilding and financial services operations depend on anticipated sales and home delivery volume in the current year as well as future years, inventory levels and related turnover, forecasted land and lot
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purchases, debt maturity dates, and other factors. If we seek such additional capital or engage in such other financial transactions, there can be no assurance that we would be able to obtain such additional capital or consummate such other financial transactions on terms acceptable to us, if at all, and such additional equity or debt financing or other financial transactions could dilute the interests of our existing shareholders, add operational limitations and/or increase our interest costs.
Included in the table below is a summary of our available sources of cash from the Credit Facility and the MIF Mortgage Repurchase Facility as of December 31, 2023:
(In thousands) Expiration
Date Outstanding
Balance Available
Amount
Notes payable – homebuilding (a)
(a) $ — $ 579,313
Notes payable – financial services (b)
(b) $ 165,844 $ 58
(a) The available amount under the Credit Facility is computed in accordance with the borrowing base calculation under the Credit Facility, which applies various advance rates for different categories of inventory and totaled $2.0 billion of availability for additional senior debt at December 31, 2023. 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 $70.7 million of letters of credit outstanding at December 31, 2023, leaving $579.3 million available. The Credit Facility has an expiration date of December 9, 2026.
(b) The available amount is computed in accordance with the borrowing base calculations under the MIF Mortgage Repurchase Facility, which may be increased by pledging additional mortgage collateral, not to exceed the maximum aggregate commitment amount of M/I Financial's repurchase agreement as of December 31, 2023, which was $300 million, which included a temporary increase applicable through February 9, 2024 (as described below) at which time the maximum aggregate commitment amount under the agreement reverts to $240 million through September 17, 2024. The MIF Mortgage Repurchase Facility has an expiration date of October 22, 2024.
Notes Payable - Homebuilding.
Homebuilding Credit Facility . The Credit Facility provides for an aggregate commitment amount of $650 million and also includes an accordion feature pursuant to which the maximum borrowing availability may be increased to an aggregate of $800 million, subject to obtaining additional commitments from lenders. The Credit Facility matures on December 9, 2026. Interest on amounts borrowed under the Credit Facility is payable at multiple interest rate options, including one, three, or six month adjusted term secured overnight financing rate (“SOFR”) (subject to a floor of 0.25%) plus a margin of 175 basis points (subject to adjustment in subsequent quarterly periods based on the Company’s leverage ratio).
Borrowings under the Credit Facility constitute senior, unsecured indebtedness and availability is subject to, among other things, a borrowing base calculated using various advance rates for different categories of inventory. The Credit Facility also provides for a $250 million sub-facility for letters of credit. The Credit Facility contains various representations, warranties and covenants which require, among other things, that the Company maintain (1) a minimum level of Consolidated Tangible Net Worth of $1.5 billion at December 31, 2023 (subject to increase over time based on earnings and proceeds from equity offerings), (2) a leverage ratio not in excess of 60%, and (3) either a minimum Interest Coverage Ratio of 1.5 to 1.0 or a minimum amount of available liquidity. In addition, the Credit Facility contains covenants that limit the Company’s number of unsold housing units and model homes, as well as the amount of Investments in Unrestricted Subsidiaries and Joint Ventures (each as defined in the Credit Facility).
The Company’s obligations under the Credit Facility are guaranteed by all of the Company’s subsidiaries, with the exception of subsidiaries that are primarily engaged in the business of mortgage financing, title insurance or similar financial businesses relating to the homebuilding and home sales business, certain subsidiaries that are not 100%-owned by the Company or another subsidiary, and other subsidiaries designated by the Company as Unrestricted Subsidiaries (as defined in the Credit Facility), subject to limitations on the aggregate amount invested in such Unrestricted Subsidiaries. The guarantors for the Credit Facility are the same subsidiaries that guarantee our 2030 Senior Notes and our 2028 Senior Notes.
As of December 31, 2023, 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, 2023:
Financial Covenant Covenant Requirement Actual
(Dollars in millions)
Consolidated Tangible Net Worth ≥ $ 1,534.4 $ 2,435.5
Leverage Ratio ≤ 0.60 0.01
Interest Coverage Ratio ≥ 1.5 to 1.0 19.9 to 1.0
Investments in Unrestricted Subsidiaries and Joint Ventures ≤ $ 730.6 $ 6.0
Unsold Housing Units and Model Homes
≤ 2,881 1,477
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Notes Payable - Financial Services.
MIF Mortgage Warehousing Agreement. The MIF Mortgage Warehousing Agreement was used to finance eligible residential mortgage loans originated by M/I Financial. On December 6, 2023, the Company terminated the MIF Mortgage Warehousing Agreement, which at the time had a borrowing availability of $120 million.
MIF Mortgage Repurchase Facilities. M/I Financial allowed the previous MIF Mortgage Repurchase Facility, dated October 30, 2017, as amended, to expire on its scheduled expiration date of October 23, 2023 and did not renew the facility.
M/I Financial entered into a new mortgage repurchase agreement on October 24, 2023 (the “MIF Mortgage Repurchase Facility”), which provides for a maximum borrowing availability of $300 million (subject to increases and decreases during certain periods) and expires on October 22, 2024. The borrowing availability under the MIF Mortgage Repurchase Facility is $300 million from November 11, 2023 through February 9, 2024, will decrease to $240 million from February 10, 2024 through September 17, 2024 and will increase to $270 million from September 18, 2024 until maturity.
The MIF Mortgage Repurchase Facility is used to finance eligible residential mortgage loans originated by M/I Financial. M/I Financial pays interest on each advance under the MIF Mortgage Repurchase Facility at a per annum rate based on Daily Adjusting One-Month Term SOFR plus a margin as defined in the repurchase agreement. The MIF Mortgage Repurchase Facility also contains certain financial covenants each of which is defined in the repurchase agreement. There are no guarantors of the MIF Mortgage Repurchase Facility.
As is typical for similar credit facilities in the mortgage origination industry, at closing, the expiration of the MIF Mortgage Repurchase Facility was set at approximately one year and is under consideration for extension annually by the participating lenders. We expect to extend the MIF Mortgage Repurchase Facility on or prior to the current expiration date of October 22, 2024, but we cannot provide any assurance that we will be able to obtain such an extension.
As of December 31, 2023, there was $165.8 million outstanding under the MIF Mortgage Repurchase Facility. M/I Financial was in compliance with all covenants thereunder. The financial covenants, as more fully described and defined in the MIF Mortgage Repurchase Facility, are summarized in the following table, which also sets forth M/I Financial’s compliance with such covenants as of December 31, 2023:
Financial Covenant Covenant Requirement Actual
(Dollars in millions)
Leverage Ratio ≤ 12.0 to 1.0 4.73 to 1.0
Liquidity ≥ $ 10.0 $ 34.2
Adjusted Net Income > $ 0.0 $ 20.0
Tangible Net Worth ≥ $ 25.0 $ 39.9
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, 2023, 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, 2023, the Company was in compliance with all terms, conditions, and covenants under the indenture.
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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, 2023, M/I Homes, Inc. had $300.0 million aggregate principal amount of its 2030 Senior Notes and $400.0 million aggregate principal amount of its 2028 Senior Notes outstanding.
The 2030 Senior Notes and the 2028 Senior Notes are fully and unconditionally guaranteed, on a joint and several basis, by all of M/I Homes, Inc.’s subsidiaries (the “Subsidiary Guarantors”) with the exception of subsidiaries that are primarily engaged in the business of mortgage financing, title insurance or similar financial businesses relating to the homebuilding and home sales business, certain subsidiaries that are not 100%-owned by M/I Homes, Inc. or another subsidiary, and other subsidiaries designated as Unrestricted Subsidiaries (as defined in the indentures governing the 2030 Senior Notes and the 2028 Senior Notes), subject to limitations on the aggregate amount invested in such Unrestricted Subsidiaries in accordance with the terms of the Credit Facility and the indentures governing the 2030 Senior Notes and the 2028 Senior Notes (the “Non-Guarantor Subsidiaries”). The Subsidiary Guarantors of the 2030 Senior Notes, the 2028 Senior Notes and the Credit Facility are the same and are listed on Exhibit 22 to this Form 10-K.
Each Subsidiary Guarantor is a direct or indirect 100%-owned subsidiary of M/I Homes, Inc. The guarantees are senior unsecured obligations of each Subsidiary Guarantor and rank equally in right of payment with all existing and future unsecured senior indebtedness of such Subsidiary Guarantor. The guarantees are effectively subordinated to any existing and future secured indebtedness of such Subsidiary Guarantor with respect to any assets comprising security or collateral for such indebtedness.
The guarantees are “full and unconditional,” as those terms are used in Regulation S-X, Rule 3-10(b)(3), except that the indentures governing the 2030 Senior Notes and the 2028 Senior Notes provide that a Subsidiary Guarantor’s guarantee will be released if: (1) all of the assets of such Subsidiary Guarantor have been sold or otherwise disposed of in a transaction in compliance with the terms of the applicable indenture; (2) all of the Equity Interests (as defined in the applicable indenture) held by M/I Homes, Inc. and the Restricted Subsidiaries (as defined in the applicable Indenture) of such Subsidiary Guarantor have been sold or otherwise disposed of to any person other than M/I Homes, Inc. or a Restricted Subsidiary in a transaction in compliance with the terms of the applicable indenture; (3) the Subsidiary Guarantor is designated an Unrestricted Subsidiary (or otherwise ceases to be a Restricted Subsidiary (including by way of liquidation or merger)) in compliance with the terms of the applicable indenture; (4) M/I Homes, Inc. exercises its legal defeasance option or covenant defeasance option under the 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.
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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, 2023
Assets:
Cash $ 695,810
Investment in joint venture arrangements $ 38,373
Amounts due from Non-Guarantor Subsidiaries $ 6,949
Total assets $ 3,769,713
Liabilities and Shareholders’ Equity:
Total liabilities $ 1,306,433
Shareholders’ equity $ 2,463,280
Summarized Statement of Income Data
Year Ended
(In thousands) December 31, 2023
Revenues $ 3,939,673
Land and housing costs $ 3,014,573
Selling, general and administrative expense $ 385,394
Income before income taxes $ 570,088
Net income $ 434,801
Weighted Average Borrowings. In 2023 and 2022, our weighted average borrowings outstanding were $749.7 million and $811.0 million, respectively, with a weighted average interest rate of 5.33% and 4.96%, respectively. The decrease in our weighted average borrowings related to decreased borrowings under our then-outstanding M/I Financial credit facilities during 2023 compared to 2022. The increase in our weighted average borrowing rate was due to higher interest rates on our credit facilities in 2023 compared to the prior year.
At both December 31, 2023 and December 31, 2022, we had no borrowings outstanding under the Credit Facility. During the twelve months ended December 31, 2023, the average daily amount outstanding and the maximum amount outstanding under the Credit Facility were both zero, and during the twelve months ended December 31, 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. Based on our currently anticipated spending on home construction, overhead expenses, share repurchases and land acquisition and development in 2024, offset by expected cash receipts from home deliveries and other sources, we do not expect to incur borrowings under the Credit Facility during 2024. To the extent we elect to borrow under the Credit Facility during 2024, the actual amount borrowed and the related timing will be subject to numerous factors, which are subject to significant variation as a result of the timing and amount of land and house construction expenditures, payroll and other general and administrative expenses, and cash receipts from home deliveries. The amount borrowed will also be impacted by other cash receipts and payments, any capital markets transactions or other additional financings by the Company, any repayments or redemptions of outstanding debt, any additional share repurchases under the 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 $70.7 million of letters of credit issued and outstanding under the Credit Facility at December 31, 2023. During 2023, the average daily amount of letters of credit outstanding under the Credit Facility was $79.5 million and the maximum amount of letters of credit outstanding under the Credit Facility was $94.9 million.
At December 31, 2023, M/I Financial had $165.8 million outstanding under the MIF Mortgage Repurchase Facility. During 2023, the average daily amount outstanding under our then-outstanding MIF credit facilities was $49.7 million and the maximum amount outstanding was $245.7 million, which occurred during January.
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
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to purchase debt securities, common shares, preferred shares or depositary shares, stock purchase contracts and units. The timing and amount of offerings, if any, will depend on market and general business conditions.
INTEREST RATES AND INFLATION
Our business is significantly affected by general economic conditions within the United States and, particularly, by the impact of interest rates and inflation. These macroeconomic trends have pressured housing affordability, negatively impacted homebuyer sentiment and impacted the costs of financing land development activities and housing construction.
The annual rate of inflation in the United States was 3.4% in December 2023, as measured by the Consumer Price Index, down from 6.5% in December 2022 and from 9.1% in June 2022 (which was the highest inflation rate experienced in 40 years). As the rate of inflation declined during 2023, our costs began to stabilize, as evidenced by our flat gross margin from year to year. However, continued increases in inflation rates could impact our costs, potentially reduce our gross margins, reduce the purchasing power of potential homebuyers, and negatively impact their ability and desire to buy a home.
Interest rates began to rise in the second half of 2023 from 6.5% at the end of 2022 to over 8% by the end of October 2023 (the highest rates since 2001). Rates declined slightly by the end of 2023 to approximately 7%. Despite these recent rate fluctuations, the interest rate environment has become less volatile than during the second half of 2022. The higher mortgage interest rates are making it more difficult for homebuyers to qualify for mortgages or to obtain mortgages at interest rates that are acceptable to them. Rising interest rates, as well as increased materials and labor costs, can also reduce gross margins.