Fitch Ratings affirms M/I Homes, Inc.'s (NYSE:MHO)
Issuer Default Rating (IDR), senior unsecured debt, and unsecured bank
credit facility ratings at 'BB'. This rating applies to approximately
$198.5 million in outstanding senior notes. The Rating Outlook is
Stable.
The ratings reflect M/I Homes' sound financial structure, relatively solid coverage ratios, and steady operating performance consistent with the current point in the housing cycle and the company's exposure to the Midwest.
Risk factors include the inherent (although somewhat tempered) cyclicality of the homebuilding industry. The ratings also manifest M/I Homes' capitalization and size and relatively heavy (though diminishing) exposure to the Midwest (Columbus and Cincinnati, OH, and Indianapolis, IN), which has been and remains the most sluggish housing region. Fitch recognizes that the company's accelerated spending on land in 2004 and 2005, noticeably in the then robust markets of Florida and greater Washington, D.C., reflected the transition in geographic emphasis, but it has also led to increased leverage and lessened coverage ratios. With the company lowering its 2006 land purchase target from $260 million to $175 million, Fitch anticipates that leverage will slim later this year and liquidity improve, benefiting from cash flow comparisons that will be much stronger than in the first half of the year and declining inventories compared to the end of the second quarter.
Fitch will also continue to closely monitor the trends of the broad housing market in its assessment of appropriate credit ratings for all homebuilders.
M/I Homes' recent revenues have been internally generated as it has not utilized corporate acquisitions. The company stepped up its growth as it channeled more capital into its non-Midwestern operations, especially Florida and greater Washington, D.C. Land purchases were $269 million in 2004 and $320 million in 2005.
The company, which was the 21st largest U.S. single-family homebuilder in 2005 as ranked by Builder Magazine, has demonstrated solid margin enhancement over recent years with homebuilding EBITDA margins increasing from 6.5% in 1997 to 12.8% in 2005, but slimming to 12.3% on a trailing 12-months basis from June 30, 2006. Although M/I Homes has benefited from strong economic conditions, a degree of margin enhancement is also attributed to broadened new product offerings and the maturing of key divisions in Florida and Metropolitan Washington D.C. In addition, margins have benefited from purchasing, access to capital, and other scale economies that have been captured by the large national homebuilders in relation to smaller builders. These economies, somewhat greater geographic diversification (than in the past), the company's presale operating strategy, and a return-on-capital focus provide the framework to soften the margin impact of declining market conditions in comparison to previous cycles. Up until just recently, acquisitions have not played a part in the company's operating strategy, as management has preferred to focus on internal growth. However, in July 2005 the company did acquire Shamrock Homes, a small privately held homebuilder in Lake County, FL that is adjacent to the greater Orlando market where M/I Homes has been building since 1985. Any future acquisitions are likely to be relatively small, either bolt-on to existing operations, or as entry into new markets.
M/I Homes' inventory turns are moderately below average as compared to its public peers and have slimmed in recent years as the company has made a conscious effort to scale up the share of the communities which it develops (to the advantage of margins). At present, the company develops in excess of 85% of the lots on which it builds homes and plans to develop about 80% of the communities from which it sells product. M/I Homes maintains an approximate 6-year supply of total lots controlled, based on trailing 12 months deliveries, and 4.5 years of owned land. Total lots controlled were 26,950 at June 30, 2006, 75.5% of which are owned, and the balance is controlled through options. Inventory/net debt stood at 2.0 times (x), providing a buffer against a further downturn in housing markets.
Year-end homebuilding debt-to-capital rather consistently declined from 53.7% in 1997 to 15.6% in 2002. Leverage rose to 27.9% in 2003 and 37.1% in 2004, which was below the company's leverage target of 50% or less. The debt-to-capital ratio was 44.0% at the end of 2005 and then advanced to 51.6% by the end of June 2006. Total adjusted homebuilding debt-to-adjusted capital was 55.3% as of June 30, 2006. FFO adjusted leverage was 4.4x at the conclusion of the June quarter. Management has targeted a debt-to-capitalization ratio of 45% by the end of calendar 2006. M/I Homes off-balance-sheet activities are principally lot options secured by deposits. Its 26 JVs (joint ventures) and LLCs (limited liability corporations) typically are unlevered with the exception of three LLCs. These JVs are typically limited liability companies that engage in land development activities for purpose of distributing developed lots to M/I Homes and its partners in the entities.
M/I Homes maintains a $750 million revolving credit agreement of which $105.4 million was available at the end of the second-quarter 2006. The credit facility, which matures in September 2008, includes up to $100 million in letters of credit. In June 2005, M/I Homes sold $50 million of senior notes in a private placement. The notes were sold as an add-on to the company's $150 million of 6.875% senior notes that were sold in March 2005. These notes are due April 2012. M/I Homes has in the past, and may continue to, opportunistically repurchase moderate amounts of its stock. The company repurchased $17.9 million in stock during the first half of 2006; $6.7 million remains in the company's repurchase authorization.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
The ratings reflect M/I Homes' sound financial structure, relatively solid coverage ratios, and steady operating performance consistent with the current point in the housing cycle and the company's exposure to the Midwest.
Risk factors include the inherent (although somewhat tempered) cyclicality of the homebuilding industry. The ratings also manifest M/I Homes' capitalization and size and relatively heavy (though diminishing) exposure to the Midwest (Columbus and Cincinnati, OH, and Indianapolis, IN), which has been and remains the most sluggish housing region. Fitch recognizes that the company's accelerated spending on land in 2004 and 2005, noticeably in the then robust markets of Florida and greater Washington, D.C., reflected the transition in geographic emphasis, but it has also led to increased leverage and lessened coverage ratios. With the company lowering its 2006 land purchase target from $260 million to $175 million, Fitch anticipates that leverage will slim later this year and liquidity improve, benefiting from cash flow comparisons that will be much stronger than in the first half of the year and declining inventories compared to the end of the second quarter.
Fitch will also continue to closely monitor the trends of the broad housing market in its assessment of appropriate credit ratings for all homebuilders.
M/I Homes' recent revenues have been internally generated as it has not utilized corporate acquisitions. The company stepped up its growth as it channeled more capital into its non-Midwestern operations, especially Florida and greater Washington, D.C. Land purchases were $269 million in 2004 and $320 million in 2005.
The company, which was the 21st largest U.S. single-family homebuilder in 2005 as ranked by Builder Magazine, has demonstrated solid margin enhancement over recent years with homebuilding EBITDA margins increasing from 6.5% in 1997 to 12.8% in 2005, but slimming to 12.3% on a trailing 12-months basis from June 30, 2006. Although M/I Homes has benefited from strong economic conditions, a degree of margin enhancement is also attributed to broadened new product offerings and the maturing of key divisions in Florida and Metropolitan Washington D.C. In addition, margins have benefited from purchasing, access to capital, and other scale economies that have been captured by the large national homebuilders in relation to smaller builders. These economies, somewhat greater geographic diversification (than in the past), the company's presale operating strategy, and a return-on-capital focus provide the framework to soften the margin impact of declining market conditions in comparison to previous cycles. Up until just recently, acquisitions have not played a part in the company's operating strategy, as management has preferred to focus on internal growth. However, in July 2005 the company did acquire Shamrock Homes, a small privately held homebuilder in Lake County, FL that is adjacent to the greater Orlando market where M/I Homes has been building since 1985. Any future acquisitions are likely to be relatively small, either bolt-on to existing operations, or as entry into new markets.
M/I Homes' inventory turns are moderately below average as compared to its public peers and have slimmed in recent years as the company has made a conscious effort to scale up the share of the communities which it develops (to the advantage of margins). At present, the company develops in excess of 85% of the lots on which it builds homes and plans to develop about 80% of the communities from which it sells product. M/I Homes maintains an approximate 6-year supply of total lots controlled, based on trailing 12 months deliveries, and 4.5 years of owned land. Total lots controlled were 26,950 at June 30, 2006, 75.5% of which are owned, and the balance is controlled through options. Inventory/net debt stood at 2.0 times (x), providing a buffer against a further downturn in housing markets.
Year-end homebuilding debt-to-capital rather consistently declined from 53.7% in 1997 to 15.6% in 2002. Leverage rose to 27.9% in 2003 and 37.1% in 2004, which was below the company's leverage target of 50% or less. The debt-to-capital ratio was 44.0% at the end of 2005 and then advanced to 51.6% by the end of June 2006. Total adjusted homebuilding debt-to-adjusted capital was 55.3% as of June 30, 2006. FFO adjusted leverage was 4.4x at the conclusion of the June quarter. Management has targeted a debt-to-capitalization ratio of 45% by the end of calendar 2006. M/I Homes off-balance-sheet activities are principally lot options secured by deposits. Its 26 JVs (joint ventures) and LLCs (limited liability corporations) typically are unlevered with the exception of three LLCs. These JVs are typically limited liability companies that engage in land development activities for purpose of distributing developed lots to M/I Homes and its partners in the entities.
M/I Homes maintains a $750 million revolving credit agreement of which $105.4 million was available at the end of the second-quarter 2006. The credit facility, which matures in September 2008, includes up to $100 million in letters of credit. In June 2005, M/I Homes sold $50 million of senior notes in a private placement. The notes were sold as an add-on to the company's $150 million of 6.875% senior notes that were sold in March 2005. These notes are due April 2012. M/I Homes has in the past, and may continue to, opportunistically repurchase moderate amounts of its stock. The company repurchased $17.9 million in stock during the first half of 2006; $6.7 million remains in the company's repurchase authorization.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.