TEXT-S&P revises M/I Homes outlook to positive
Overview -- We revised the outlook on M/I Homes Inc. to positive from stable. -- The outlook revision reflects a faster than expected return to profitability and our expectation for stronger credit metrics through greater operating leverage over the next year. -- Our positive outlook acknowledges M/I Homes' recently strengthened liquidity and incorporates our view that single-family housing fundamentals are slowly improving. -- We also affirmed our 'B-' corporate credit rating and our ratings on existing debt. Rating Action On Nov. 29, 2012, Standard & Poor's Ratings Services revised the outlook on M/I Homes Inc. to positive from stable. At the same time, we affirmed our 'B-' corporate credit rating and our existing debt ratings on the company. We also maintain a '3' recovery rating on the company's senior unsecured notes, indicating our expectation for a meaningful (50%-70%) recovery in the event of a payment default. Rationale The outlook revision reflects M/I Home's faster than expected return to profitability, driven by improved margins on new communities and a faster sales pace in all markets from a relatively firmer overall housing environment. We believe the company's strategy to expand community count in its better performing markets will result in stronger credit metrics through greater operating leverage. The outlook also considers the company's improved liquidity cushion provided by a capital raise of equity and subordinated convertible notes in the third quarter of 2012. Standard & Poor's ratings on Columbus, Ohio-based M/I Homes reflect the homebuilder's "aggressive" financial risk profile, marked by improving but still weak EBITDA-based credit metrics. We characterize M/I Homes' business risk profile as "vulnerable," given the homebuilder's comparatively smaller platform and current concentration in certain weaker Midwest housing markets. Columbus, Ohio-based M/I Homes is the nation's 16th-largest homebuilder, having delivered 2,545 homes at an estimated average sales price of $258,000 during the 12 months ended Sept. 30, 2012. As of third-quarter 2012, the homebuilder operated 128 active communities in the Midwest, mid-Atlantic, and the South, selling attached and freestanding single-family homes to mostly entry-level and move-up buyers. We estimate that roughly half of M/I Homes' inventory is in weak, Midwest markets. Although M/I Homes' smaller platform is a credit negative, we view the homebuilder as a dominant player in its respective submarkets. M/I Homes reported $6.6 million in net income (excluding one-time items) in the third quarter of 2012. The company delivered 28% more homes than the prior year due to a 7% increase in community count and 20% increase in homes closed per community. Average selling prices in the third quarter also increased 12% year-over-year to $266,000, pushing homebuilding revenue up 46%. Homebuilding gross margins (before impairments, interest, and financial services income) expanded 110 basis points to 19.1%. M/I homes is now selling roughly 70% of homes out of new communities (opened in 2009 or later), which produce generally greater gross margins than its legacy communities. As M/I Homes opens newer communities over the next year, we expect operating metrics and profitability levels to continue to improve. M/I Homes' balance sheet leverage remains aggressive, but has declined to levels of higher-rated homebuilding peers. Total debt-to-EBITDA (including financial services debt) was 8.7x on a trailing-12-month basis at the end of the third quarter and we expect this to fall below 7x in 2013. Debt-to-total capitalization was roughly 59%, while cash and inventory covered debt by 1.7x. Standard & Poor's criteria assigns 50% equity/50% debt treatment to the company's $100 million of 9.75% noncumulative preferred shares, which are not currently paying a dividend. EBITDA covered interest by roughly 1.8x and will improve to greater than 2x in 2013, in our opinion. Liquidity M/I Home's liquidity is adequate, in our opinion, and should be sufficient to meet estimated obligations through 2013. We based our liquidity assessment on the following factors: -- We expect the company's liquidity sources (cash reserves, revolver availability, and cash from operations) to exceed its uses by more than 1.2x. -- There are no material debt maturities over the next two years. -- Even if EBITDA declined by 20%, we believe net sources would exceed cash requirements over the next 12 months. Sources of liquidity at Sept. 30, 2012, included $160 million of unrestricted cash and $55 million of borrowing capacity under its $140 million senior secured revolver ($73 million of availability from pledged collateral less $18 million in outstanding letters of credit). We believe M/I Homes will also generate an estimated $60 million of EBITDA and $150 million-$170 million of cash from the liquidation of land inventory sold over the next year. The majority of our forecasted uses of cash consist of working capital needs for land acquisition and development spending in 2013, which we anticipate will exceed the $180 million-$210 million range in 2012 by 10%-20%. The company will also have roughly $24 million of cash interest expense. The indenture under the company's 2018 notes has historically restricted the payment of dividends on the $100 million of 9.75% noncumulative preferred shares since 2008. The restricted payment basket on the 2018 notes is now positive by $36.6 million, allowing the distribution of dividends and repurchase of shares up to an equal amount. Our liquidity analysis does not consider the future potential payment of dividends or repurchase of shares, either of which could alter our view on the company's liquidity position. Recovery analysis The rating on the company's senior unsecured notes is 'B-' (the same as the corporate credit rating), with a recovery rating of '3', which indicates our expectations for a meaningful recovery (50%-70%) in the event of a payment default. The rating on the company's convertible senior subordinated notes is 'CCC' with a recovery rating of '6', which indicates our expectations for a negligible recovery (0%-10%) in the event of a payment default. For our complete recovery rating analysis, see "Recovery Report: M/I Homes Inc.'s Recovery Rating Profile," published Sept. 5, 2012 on RatingsDirect. Outlook Our positive outlook acknowledges M/I Homes' recently strengthened liquidity and incorporates our view that single-family housing fundamentals are slowly improving. We expect M/I Homes to maintain adequate liquidity, while investing the bulk of its cash in new communities to bolster sales and gross margins to levels that support gradually improving profitability over the next one to two years. An upgrade would require the company to achieve and sustain improved financial metrics given its smaller platform and exposure to weaker homebuilding markets. We could revise the outlook back to stable if liquidity becomes less than adequate, perhaps due to more aggressive land investment activity than we currently anticipate or the reinstatement of dividend distributions. Related Research And Criteria -- Industry Report Card: U.S. Homebuilders Pivot Toward Growth, Oct. 17, 2012 -- Issuer Ranking: U.S. Homebuilders, Strongest To Weakest, Oct. 12, 2012 -- Federal Loan Programs Support Sales For U.S. Homebuilders And Offset Tight Lending Standard, Oct. 8, 2012 -- Recovery Report: M/I Homes Inc.'s Recovery Rating Profile, Sept. 5, 2012 -- Key Credit Factors: Global Criteria For Single-Family Homebuilders, Sept. 27, 2011 -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 Ratings List Ratings Affirmed; CreditWatch/Outlook Action To From M/I Homes Inc. Corporate Credit Rating B-/Positive/-- B-/Stable/-- Ratings Affirmed M/I Homes Inc. Senior Unsecured Local Currency B- Recovery Rating 3 3 Subordinated Local Currency CCC Recovery Rating 6 6 Preferred Stock C Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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