-- We revised the outlook on M/I Homes Inc. to positive from
-- 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
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.
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
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.
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.
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.
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
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,
-- 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,
-- 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 Affirmed; CreditWatch/Outlook Action
M/I Homes Inc.
Corporate Credit Rating B-/Positive/-- B-/Stable/--
M/I Homes Inc.
Local Currency B-
Recovery Rating 3 3
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