Fitch Affirms M/I Homes' IDR at 'B'; Outlook Stable

Fitch Ratings has affirmed M/I Homes, Inc.'s (NYSE: MHO) ratings, including the company's Issuer Default Rating (IDR) at 'B'. The Rating Outlook is Stable. A complete list of ratings follows at the end of this release.

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.

MHO maintains an approximately 4.5-year supply of total lots controlled, based on trailing 12 months deliveries, and 3.1 years of owned land. Total lots controlled were 10,353 lots at Dec. 31, 2011, 69.1% 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, which is roughly 20%-25% below what the company had initially expected to spend as of early 2011 as market conditions remained weak, particularly during the first half of the year. Based on the current environment, MHO expects land and development spending in 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 2011 with $59.8 million of unrestricted cash and $51.6 million of availability under its $140 million revolving credit facility that matures in December 2014. The company has $41.4 million of senior notes coming due in April 2012, which will be repaid from cash on hand and borrowings under the revolver. Cash is expected to diminish in the next 12 months as the company pays down some debt and continues to build its land position. Nevertheless, Fitch expects the company to maintain a suitable liquidity position with adequate borrowing availability under its revolving credit facility.

The company reported higher year-over-year home deliveries during the second half of 2011, and homebuilding revenues grew 5.7% compared to the second half of 2010. MHO also reported improvement in net orders in each of the last three quarters of 2011, leading to a 27% increase in homes in backlog at year-end 2011 compared with year-end 2010. 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.

Certain recent economic/construction related statistics, such as job growth, consumer confidence, mortgage rates, household formations, multifamily starts, existing home sales, pending home sales, housing inventories, and foreclosures were improving and/or above consensus. A few key statistics such as single-family housing starts, new home sales, home prices (CoreLogic, Case Shiller) were declining/short of expectations. Overall, the current setting is much like at the beginning of 2011.

Fitch's housing forecasts for 2012 assume a modest rise off a very low bottom. New home inventories are at historically low levels and affordability is at near record highs. In a slowly growing economy with distressed home sales competition similar to 2011, less competitive rental cost alternatives, and, probably, even lower mortgage rates on average, single-family housing starts should improve about 5% to 450,000, while new home sales increase approximately 5.6% to 319,000 and existing home sales grow 3% to 4.388 million.

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 has affirmed the following ratings for MHO with a Stable Outlook:

--Long-term IDR at 'B';

--Senior unsecured notes at 'B+/RR3';

--Series A non-cumulative perpetual preferred stock at '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 preferred stock indicates poor recovery prospects in a default scenario. Fitch applied a liquidation value analysis for these RRs.

Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 12, 2011);

--'Liquidity Considerations for Corporate Issuers' (June 12, 2007).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

Liquidity Considerations for Corporate Issuers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=328666

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Contacts:

Fitch, Inc.
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Robert Rulla, CPA, [phone]
Director
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Chicago, IL 60602
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Secondary Analyst
Robert Curran, [phone]
Managing Director
or
Committee Chairperson
John Witt, [phone]
Senior Director
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