Sept 5 - Fitch Ratings has assigned a 'CCC+/RR6' rating to M/I Homes, Inc.'s
(NYSE: MHO) proposed offering of $50 million convertible senior
subordinated notes due 2017. These notes will be subordinated in right of
payment to the company's existing and future senior debt, including the
company's revolving credit facility and senior unsecured notes. Proceeds from
the notes issuance will be used for general corporate purposes, which may
include acquisitions of land, land development, home construction, capital
expenditures, increasing its working capital and repayment of debt.
The Rating Outlook is Stable. A complete list of ratings follows at the end of
MHO's ratings and Outlook reflect the company's execution of its business model
in the current housing environment, management's demonstrated ability to manage
land and development spending, healthy liquidity position and better prospects
for the housing sector this year.
MHO successfully managed its balance sheet during the severe housing downturn,
allowing the company to accumulate cash and pay down its debt as it pared down
its inventory. After significantly reducing its lot inventory during the 2006 to
2009 periods, MHO began to focus on growing its business in late 2009 by
investing in new communities and entering new markets. In 2010, the company
increased its total lot position by 9.2% and expanded into the Houston, Texas
market. During 2011, the company entered the San Antonio, Texas market and also
grew its total lot position by 1.8%, although the increase was due to lots under
option as its owned lot position actually declined 6% year-over-year. At June
30, 2012, total lots controlled expanded 3% year-over-year and MHO expanded its
Houston, Texas operations by acquiring the assets of a privately-held
MHO maintains an approximately 4.4-year supply of total lots controlled, based
on trailing 12 months deliveries, and 2.7 years of owned land. Total lots
controlled were 10,594 lots at June 30, 2012, 61.3% of which are owned, and the
balance is controlled through options. Historically, MHO developed about 80% of
its communities from which it sells product, resulting in inventory turns that
were moderately below average as compared to its public peers. During the
downturn, MHO had been less focused on land development and a majority of its
newer land purchases were and continue to be finished lots.
During 2011, the company spent $117 million on land and development. Through the
first half of 2012, land and development spending totaled $77 million, roughly
35% higher than the $57 million spent during the first half of 2011. Based on
the current environment, MHO expects land and development spending for all of
2012 will be higher than 2011 levels. As a result, Fitch expects MHO to be cash
flow negative again this year largely due to this greater level of real estate
spending. Fitch is comfortable with this strategy given management's
demonstrated ability to manage its inventory and adjust land and development
spending to maintain a healthy liquidity position, as it did during 2011.
MHO ended the June 2012 quarter with $44.3 million of unrestricted cash and $52
million of availability under its $140 million revolving credit facility that
matures in December 2014. In conjunction with the notes issuance, MHO is also
offering 2.2 million shares of its common stock. The proposed notes and equity
offerings should provide the company with additional liquidity to fund future
anticipated growth in its operations.
The company reported higher year-over-year home deliveries during the first half
of 2012, and homebuilding revenues grew 21.3% compared to the first half of
2011. MHO also reported improvement in net orders in each of the last five
quarters, contributing to a 40% increase in homes in backlog at June 30, 2012
compared with a year ago levels. The significant increase in backlog, combined
with the company's strategy to grow subdivision count by 5%-10% this year,
should result in moderately higher deliveries in 2012 compared with 2011.
Builder and investor enthusiasm have for the most part surged so far in 2012.
However, national housing metrics have not entirely kept pace. Year-over-year
comparisons have been solidly positive on a consistent basis. However, month to
month the national statistics (single-family starts, new home, and existing home
sales) have been erratic and, at times, below expectations. In any case, year to
date these housing metrics are well above 2011 levels. As Fitch has noted in the
past, recovery will likely occur in fits and starts.
Fitch's housing forecasts for 2012 have been raised since early spring but still
assume only a moderate rise off a very low bottom. In a slowly growing economy
with relatively similar distressed home sales competition, less competitive
rental cost alternatives, and new home inventories at historically low levels,
single-family housing starts should improve about 12%, while new home sales
increase approximately 10.5% and existing home sales grow 5.6%. Further moderate
improvement is forecast for 2013.
Future ratings and Outlooks will be influenced by broad housing market trends as
well as company specific activity, such as trends in land and development
spending, general inventory levels, speculative inventory activity (including
the impact of high cancellation rates on such activity), gross and net new order
activity, debt levels and especially free cash flow trends and uses, and the
company's cash and liquidity position. Negative rating actions could occur if
the anticipated recovery in housing does not materialize and the company
prematurely steps up its land/development spending, leading to consistent and
significant negative quarterly cash flow from operations and diminished
liquidity position. MHO's rating is constrained in the intermediate term due to
weak credit metrics, but a Positive Outlook may be considered if the recovery in
housing is significantly better than Fitch's outlook and the company shows
further improvement in credit metrics and its liquidity position.
Fitch currently rates MHO as follows:
--Long-term IDR 'B';
--Senior unsecured notes 'B+/RR3';
--Series A non-cumulative perpetual preferred stock 'CCC/RR6'.
The Recovery Rating (RR) of 'RR3' on MHO's senior unsecured notes indicates good
recovery prospects for holders of this debt issue. MHO's exposure to claims made
pursuant to performance bonds and the possibility that part of these contingent
liabilities would have a claim against the company's assets were considered in
determining the recovery for the unsecured debt holders. The 'RR6' on MHO's
proposed convertible senior subordinated notes and preferred stock indicates
poor recovery prospects in a default scenario. Fitch applied a liquidation value
analysis for these recovery ratings.