ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
M/I Homes, Inc. and subsidiaries (the “Company” or “we”) is one of the nation’s leading builders of single-family homes having sold over 145,600 homes since commencing homebuilding activities in 1976. The Company’s homes are marketed and sold primarily under the M/I Homes brand. The Company has homebuilding operations in Columbus and Cincinnati, Ohio; Indianapolis, Indiana; Chicago, Illinois; Minneapolis/St. Paul, Minnesota; Detroit, Michigan; Ft. Myers/Naples, Tampa, Sarasota and Orlando, Florida; Austin, Dallas/Fort Worth, Houston and San Antonio, Texas; Charlotte and Raleigh, North Carolina; and Nashville, Tennessee.
Included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are the following topics relevant to the Company’s performance and financial condition:
•Information Relating to Forward-Looking Statements;
•Application of Critical Accounting Estimates and Policies;
•Results of Operations;
•Discussion of Our Liquidity and Capital Resources; and
•Impact of Interest Rates and Inflation.
FORWARD-LOOKING STATEMENTS
Certain information included in this report or in other materials we have filed or will file with the Securities and Exchange Commission (the “SEC”) (as well as information included in oral statements or other written statements made or to be made by us) contains or may contain forward-looking statements, including, but not limited to, statements regarding our future financial performance and financial condition. Words such as “expects,” “anticipates,” “envisions,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of such words and similar expressions are intended to identify such forward-looking statements. Forward-looking statements involve a number of risks and uncertainties. Any forward-looking statements that we make herein and in future reports and statements are not guarantees of future performance, and actual results may differ materially from those in such forward-looking statements as a result of various risk factors, including, without limitation, factors relating to the economic environment, interest rates, availability of resources, competition, market concentration, land development activities, construction defects, product liability and warranty claims and various governmental rules and regulations. See “Item 1A. Risk Factors” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”), as the same may be updated from time to time in our subsequent filings with the SEC, for more information regarding those risk factors.
Any forward-looking statement speaks only as of the date made. Except as required by applicable law, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in our subsequent reports on Forms 10-K, 10-Q and 8-K should be consulted. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995, and all of our forward-looking statements are expressly qualified in their entirety by the cautionary statements contained or referenced in this section.
APPLICATION OF CRITICAL ACCOUNTING ESTIMATES AND POLICIES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Management bases its estimates and assumptions on historical experience and various other factors that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. On an ongoing basis, management evaluates such estimates and assumptions and makes adjustments as deemed necessary. Actual results could differ from these estimates using different estimates and assumptions, or if conditions are significantly different in the future. See Note 1 (Summary of Significant Accounting Policies) to our consolidated financial statements included in our 2022 Form 10-K for additional information about our accounting policies.
We believe that there have been no significant changes to our critical accounting policies during the quarter ended March 31, 2023 as compared to those disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2022 Form 10-K.
RESULTS OF OPERATIONS
Our reportable segments are: Northern homebuilding; Southern homebuilding; and financial services operations. The homebuilding operating segments that comprise each of our reportable segments are as follows:
| | | | | | |
Northern | Southern | |
Chicago, Illinois | Ft. Myers/Naples, Florida | |
Cincinnati, Ohio | Orlando, Florida | |
Columbus, Ohio | Sarasota, Florida | |
Indianapolis, Indiana | Tampa, Florida | |
Minneapolis/St. Paul, Minnesota | Austin, Texas | |
Detroit, Michigan | Dallas/Fort Worth, Texas | |
| Houston, Texas | |
| San Antonio, Texas | |
| Charlotte, North Carolina | |
| Raleigh, North Carolina | |
| Nashville, Tennessee | |
Overview
During the first quarter of 2023, we continued to experience weaker homebuyer demand compared to the same period last year as a result of the uncertain macroeconomic conditions that began to significantly impact the broader U.S. economy during the second half of 2022, particularly the historic rise in mortgage interest rates and the high rate of inflation not experienced since the 1970s. We believe that these conditions caused many potential homebuyers to postpone their homebuying decisions. Although mortgage interest rates continue to fluctuate, the average 30-year fixed mortgage interest rate has hovered around 7% during the first quarter of 2023. These conditions negatively impacted our overall new contracts during the first quarter of 2023 due to a softer demand environment compared to prior year, resulting in a 14% decline in new contracts.
We believe that potential homebuyers are adjusting to higher interest rates and cautiously reentering the housing market despite continuing affordability and economic recession concerns. We also believe that the incentives and price reductions we have offered in certain locations as well as seasonal trends have further encouraged demand. We continue to believe long-term housing market fundamentals remain strong, including favorable demographics and a limited supply of new and resale inventory.
Despite the challenges impacting the homebuilding industry, we achieved the following results during the first quarter of 2023 in comparison to the first quarter of 2022:
•Revenue increased 16% to $1.00 billion (a first quarter record)
•Average sales price of homes delivered increased 6% to $486,000 (a first quarter record)
•Number of homes delivered increased 10% to 2,007 homes (second highest first quarter in Company history)
•Income before income taxes increased 11% to $136.0 million (a first quarter record)
•Net income increased 12% to $103.1 million (a first quarter record)
•Shareholders’ equity of $2.18 billion (a record high for the Company)
These increases reflect the strong demand for our homes that existed through the first half of 2022, as many of the homes delivered in the first quarter of 2023 were placed under contract prior to the softening of demand in the latter half of 2022.
Our company-wide absorption pace of sales per community for the first quarter of 2023 declined to 3.7 per month compared to 4.8 per month for the prior year’s first quarter as a result of increased average community count to 198 for the first quarter of 2023 from 176 for the first quarter of 2022 and the decrease in the number of new contracts during the quarter compared to prior year. We plan to open a number of new communities in 2023, increasing our community count by approximately 15% from the end of 2022. However, given the uncertainty in the housing market as a result of current economic conditions, we may choose to delay the development and opening of some new communities to match homebuyer demand in the remainder of 2023.
Summary of Company Financial Results
Income before income taxes for the first quarter of 2023 increased 11% from $122.3 million in the first quarter of 2022 to a first quarter record $136.0 million in 2023. We also achieved first quarter record net income of $103.1 million, or $3.64 per diluted share, in 2023's first quarter, compared to net income of $91.8 million, or $3.16 per diluted share, in 2022's first quarter. Our effective tax rate was 24.2% in 2023’s first quarter compared to 24.9% in 2022.
During the quarter ended March 31, 2023, we recorded first quarter record total revenue of $1.00 billion, of which $974.9 million was from homes delivered, $0.3 million was from land sales and $25.3 million was from our financial services operations. Revenue from homes delivered increased 17% in 2023's first quarter compared to the same period in 2022 driven primarily by a 6% increase in the average sales price of homes delivered ($29,000 per home delivered) and a 10% increase in the number of homes delivered (184 units). The increases were due primarily to the robust consumer demand in early 2022 when the majority of our homes delivered during the quarter were placed under contract. Revenue from land sales decreased $3.2 million from the first quarter of 2022 due to fewer land sales in the current year period compared to prior year. Revenue from our financial services segment increased 5% to $25.3 million in the first quarter of 2023 as a result of an increase in the average loan amount and slightly higher margins on loans sold during the period compared to the first quarter of 2022, offset partially by a decrease in loans closed compared to the first quarter of 2023.
Total gross margin (total revenue less total land and housing costs) increased $21.5 million in the first quarter of 2023 compared to the first quarter of 2022 as a result of a $20.3 million improvement in the gross margin of our homebuilding operations (housing gross margin and land sales gross margin) and a $1.2 million increase in the gross margin of our financial services operations. With respect to our homebuilding gross margin, our gross margin on homes delivered (housing gross margin) increased $21.3 million primarily as a result of the 6% increase in average sales price of homes delivered and the 10% increase in the number of homes delivered. Our housing gross margin percentage declined 110 basis points from 22.6% in prior year's first quarter to 21.5% in 2023's first quarter, primarily as a result of increased construction and lot costs, offset partially by the increase in average sales price of homes delivered compared to prior year. Our housing gross margin may fluctuate from quarter to quarter depending on the mix of communities delivering homes due to the variation in margin between different communities. Our gross margin on land sales (land sale gross margin) declined $1.0 million in the first quarter of 2023 compared to the first quarter of 2022 as a result of fewer land sales in the current year first quarter compared to the prior year. The gross margin of our financial services operations increased $1.2 million in the first quarter of 2023 compared to the first quarter of 2022 as a result of slightly higher margins on loans sold and an increase in the average loan amount during the first quarter of 2023 compared to the first quarter of 2022, partially offset by a decrease in the number of loan originations.
Headwinds from supply chain issues and regulatory delays have impacted development completions and model openings which have delayed planned community openings. We opened 19 new communities during the first quarter of 2023 and closed 15 communities.
For the three months ended March 31, 2023, selling, general and administrative expense increased $9.8 million, which partially offset the increase in our total gross margin discussed above, but improved as a percentage of revenue from 10.5% in the first quarter of 2022 to 10.0% in the first quarter of 2023 (a first quarter record). Selling expense increased $7.6 million from 2022's first quarter and increased as a percentage of revenue to 4.9% in 2023's first quarter from 4.8% for the same period in 2022. Variable selling expense for sales commissions contributed $6.5 million to the increase due to the higher number of homes delivered during the first quarter of 2023. Non-variable selling expense increased $1.1 million primarily as a result of increased costs associated with our sales offices and models. General and administrative expense increased $2.2 million compared to the first quarter of 2022 and improved as a percentage of revenue from 5.7% in the first quarter of 2022 to 5.1% in the first quarter of 2023. The increase in general and administrative expense was primarily due to an increase in compensation-related expenses due to our strong financial performance during the quarter.
Outlook
Housing market conditions remained uncertain during the first quarter of 2023, resulting in weaker overall demand for new homes compared to the same period last year. We attribute this decline in demand to various macroeconomic conditions, including steep increases in mortgage rates since January 2022, substantial increases in home prices over the past two years, the high rate of inflation, and economic recession concerns of our potential homebuyers. The extent to which these factors will continue to impact our business is highly uncertain and unpredictable, and our past performance should not be considered indicative of our future results on any metric or set of metrics given the uncertainty in the U.S. economy.
Despite these negative economic developments, we believe that the homebuilding industry will continue to benefit over the long term from a continued undersupply of available homes, positive consumer demographics, scarcity of rentals and increasing rent prices.
We believe that we are well positioned to manage through these challenging economic conditions with our affordable product offerings, lot supply and planned new community openings. We remain sensitive to the changes in market conditions, and continue to focus on controlling overhead leverage, carefully managing our investment in land and land development spending and offering incentives, including mortgage interest rate buy-downs, to retain our backlog and improve our sales pace. Our strong balance sheet and liquidity position should also provide us with the flexibility to operate effectively through changing economic conditions. However, we cannot provide any assurances that the strategic business objectives listed below will remain successful, and we may need to adjust elements of our strategy to effectively address evolving market conditions.
We expect to emphasize the following strategic business objectives throughout the remainder of 2023 and into 2024:
•managing our land spend and inventory levels;
•improving our build cycle time;
•opening new communities;
•managing overhead spend;
•maintaining a strong balance sheet and liquidity levels; and
•emphasizing customer service, product quality and design, and premier locations.
During the first three months of 2023, we invested $45.6 million in land acquisitions and $92.4 million in land development. We invested in fewer land acquisitions in the first quarter of 2023 compared to prior year’s first quarter due to declining demand for new homes and invested more in land development to finish lots needed to start homes and allow us to open new communities in an effort to increase demand and sales. We continue to closely review all of our land acquisition and land development spending and monitor our ongoing pace of home sales and deliveries, and we will adjust our land and investment spend accordingly. However, as a result of the impacts of current market conditions and municipality delays, we are not providing land spending estimates for 2023 at this time.
We ended the first quarter of 2023 with approximately 40,700 lots under control, which represents approximately a 5-year supply of lots based on the past twelve months of homes delivered, including certain lots that we anticipate selling to third parties. This represents a 11% decrease from our approximately 45,800 lots under control at the end of last year’s first quarter.
We opened 19 communities and closed 15 communities in the first quarter of 2023, ending the first quarter with 200 active communities, compared to 176 at the end of last year’s first quarter. Although the timing of opening new communities and closing existing communities is subject to substantial variation, we expect to grow our community count by approximately 15% by the end of 2023.
While we believe the remainder of 2023 will be very challenging compared to the strong market conditions during the first half of 2022 and the previous few years, we also believe that we are well positioned with a strong balance sheet and backlog to manage through the current economic environment. However, the challenging macroeconomic conditions described above could materially and negatively affect our performance in 2023, particularly when compared to our performance over the past few years.
Future economic and homebuilding industry conditions and the demand for homes are subject to continued uncertainty due to many factors, including the impacts of increased mortgage interest rates, inflation, materials and labor cost increases, supply chain disruptions and labor shortages, and the further impact of these actions on the economy, employment levels, consumer confidence, and financial markets, among other things. These factors are highly uncertain and outside our control. As a result, our past performance may not be indicative of future results.
The following table shows, by segment: revenue; gross margin; selling, general and administrative expense; operating income (loss); and interest expense (income) for the three months ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | |
(In thousands) | 2023 | | 2022 | | | | | | |
Revenue: | | | | | | | | | |
Northern homebuilding | $ | 382,730 | | | $ | 353,786 | | | | | | | |
Southern homebuilding | 592,519 | | | 482,914 | | | | | | | |
Financial services (a) | 25,281 | | | 24,111 | | | | | | | |
Total revenue | $ | 1,000,530 | | | $ | 860,811 | | | | | | | |
| | | | | | | | | |
Gross margin: | | | | | | | | | |
Northern homebuilding | $ | 66,500 | | | $ | 67,108 | | | | | | | |
Southern homebuilding | 142,845 | | | 121,890 | | | | | | | |
Financial services (a) | 25,281 | | | 24,111 | | | | | | | |
Total gross margin | $ | 234,626 | | | $ | 213,109 | | | | | | | |
| | | | | | | | | |
Selling, general and administrative expense: | | | | | | | | | |
Northern homebuilding | $ | 27,340 | | | $ | 26,892 | | | | | | | |
Southern homebuilding | 45,233 | | | 37,597 | | | | | | | |
Financial services (a) | 10,313 | | | 10,178 | | | | | | | |
Corporate | 17,154 | | | 15,537 | | | | | | | |
Total selling, general and administrative expense | $ | 100,040 | | | $ | 90,204 | | | | | | | |
| | | | | | | | | |
Operating income (loss): | | | | | | | | | |
Northern homebuilding | $ | 39,160 | | | $ | 40,216 | | | | | | | |
Southern homebuilding | 97,612 | | | 84,293 | | | | | | | |
Financial services (a) | 14,968 | | | 13,933 | | | | | | | |
Less: Corporate selling, general and administrative expense | (17,154) | | | (15,537) | | | | | | | |
Total operating income | $ | 134,586 | | | $ | 122,905 | | | | | | | |
| | | | | | | | | |
Interest (income) expense: | | | | | | | | | |
Northern homebuilding | $ | (46) | | | $ | — | | | | | | | |
Southern homebuilding | (2) | | | (2) | | | | | | | |
Financial services (a) | 2,327 | | | 878 | | | | | | | |
Corporate | (3,668) | | | (205) | | | | | | | |
Total interest (income) expense | $ | (1,389) | | | $ | 671 | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Other income | (7) | | | (16) | | | | | | | |
| | | | | | | | | |
Income before income taxes | $ | 135,982 | | | $ | 122,250 | | | | | | | |
(a)Our financial services operational results should be viewed in connection with our homebuilding business as its operations originate loans and provide title services primarily for our homebuyers, with the exception of a small amount of mortgage refinancing.
The following tables show total assets by segment at March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| At March 31, 2023 |
(In thousands) | Northern | | Southern | | Corporate, Financial Services and Unallocated | | Total |
Deposits on real estate under option or contract | $ | 8,057 | | | $ | 50,853 | | | $ | — | | | $ | 58,910 | |
Inventory (a) | 996,537 | | | 1,601,962 | | | — | | | 2,598,499 | |
Investments in joint venture arrangements | — | | | 49,031 | | | — | | | 49,031 | |
Other assets | 43,358 | | | 112,146 | | (b) | 900,426 | | | 1,055,930 | |
Total assets | $ | 1,047,952 | | | $ | 1,813,992 | | | $ | 900,426 | | | $ | 3,762,370 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2022 |
(In thousands) | Northern | | Southern | | Corporate, Financial Services and Unallocated | | Total |
Deposits on real estate under option or contract | $ | 8,138 | | | $ | 47,601 | | | $ | — | | | $ | 55,739 | |
Inventory (a) | 1,100,472 | | | 1,672,391 | | | — | | | 2,772,863 | |
Investments in joint venture arrangements | — | | | 51,554 | | | — | | | 51,554 | |
Other assets | 38,265 | | | 103,182 | | (b) | 693,320 | | | 834,767 | |
Total assets | $ | 1,146,875 | | | $ | 1,874,728 | | | $ | 693,320 | | | $ | 3,714,923 | |
(a)Inventory includes: single-family lots, land and land development costs; land held for sale; homes under construction; model homes and furnishings; community development district infrastructure; and consolidated inventory not owned.
(b)Includes development reimbursements from local municipalities.
Reportable Segments
The following table presents, by reportable segment, selected operating and financial information as of and for the three months ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | |
(Dollars in thousands) | 2023 | | 2022 | | | | | | |
Northern Region | | | | | | | | | |
Homes delivered | 797 | | | 760 | | | | | | | |
New contracts, net | 828 | | | 1,190 | | | | | | | |
Backlog at end of period | 1,087 | | | 2,320 | | | | | | | |
Average sales price of homes delivered | $ | 480 | | | $ | 466 | | | | | | | |
Average sales price of homes in backlog | $ | 515 | | | $ | 494 | | | | | | | |
Aggregate sales value of homes in backlog | $ | 559,536 | | | $ | 1,144,989 | | | | | | | |
Housing revenue | $ | 382,630 | | | $ | 353,786 | | | | | | | |
Land sale revenue | $ | 100 | | | $ | — | | | | | | | |
Operating income homes (a) | $ | 39,156 | | | $ | 40,216 | | | | | | | |
Operating income land | $ | 4 | | | $ | — | | | | | | | |
Number of average active communities | 101 | | | 92 | | | | | | | |
Number of active communities, end of period | 104 | | | 94 | | | | | | | |
Southern Region | | | | | | | | | |
Homes delivered | 1,210 | | | 1,063 | | | | | | | |
New contracts, net | 1,343 | | | 1,324 | | | | | | | |
Backlog at end of period | 2,214 | | | 3,206 | | | | | | | |
Average sales price of homes delivered | $ | 490 | | | $ | 451 | | | | | | | |
Average sales price of homes in backlog | $ | 526 | | | $ | 513 | | | | | | | |
Aggregate sales value of homes in backlog | $ | 1,165,014 | | | $ | 1,643,245 | | | | | | | |
Housing revenue | $ | 592,316 | | | $ | 479,377 | | | | | | | |
Land sale revenue | $ | 203 | | | $ | 3,537 | | | | | | | |
Operating income homes (a) | $ | 97,619 | | | $ | 83,326 | | | | | | | |
Operating (loss) income land | $ | (7) | | | $ | 967 | | | | | | | |
Number of average active communities | 97 | | | 84 | | | | | | | |
Number of active communities, end of period | 96 | | | 82 | | | | | | | |
Total Homebuilding Regions | | | | | | | | | |
Homes delivered | 2,007 | | | 1,823 | | | | | | | |
New contracts, net | 2,171 | | | 2,514 | | | | | | | |
Backlog at end of period | 3,301 | | | 5,526 | | | | | | | |
Average sales price of homes delivered | $ | 486 | | | $ | 457 | | | | | | | |
Average sales price of homes in backlog | $ | 522 | | | $ | 505 | | | | | | | |
Aggregate sales value of homes in backlog | $ | 1,724,550 | | | $ | 2,788,234 | | | | | | | |
Housing revenue | $ | 974,946 | | | $ | 833,163 | | | | | | | |
Land sale revenue | $ | 303 | | | $ | 3,537 | | | | | | | |
Operating income homes (a) | $ | 136,775 | | | $ | 123,542 | | | | | | | |
Operating (loss) income land | $ | (3) | | | $ | 967 | | | | | | | |
Number of average active communities | 198 | | | 176 | | | | | | | |
Number of active communities, end of period | 200 | | | 176 | | | | | | | |
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(a)Includes the effect of total homebuilding selling, general and administrative expense for the region as disclosed in the first table set forth in this “Outlook” section.
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
(Dollars in thousands) | 2023 | | 2022 | | | | |
Financial Services | | | | | | | |
Number of loans originated | 1,258 | | | 1,271 | | | | | |
Value of loans originated | $ | 494,461 | | | $ | 479,780 | | | | | |
| | | | | | | |
Revenue | $ | 25,281 | | | $ | 24,111 | | | | | |
Less: Selling, general and administrative expenses | 10,313 | | | 10,178 | | | | | |
Less: Interest expense | 2,327 | | | 878 | | | | | |
| | | | | | | |
Income before income taxes | $ | 12,641 | | | $ | 13,055 | | | | | |
A home is included in “new contracts” when our standard sales contract is executed. “Homes delivered” represents homes for which the closing of the sale has occurred. “Backlog” represents homes for which the standard sales contract has been executed, but which are not included in homes delivered because closings for these homes have not yet occurred as of the end of the period specified.
The composition of our homes delivered, new contracts, net and backlog is constantly changing and may be based on a dissimilar mix of communities between periods as new communities open and existing communities wind down. Further, home types and individual homes within a community can range significantly in price due to differing square footage, option selections, lot sizes and quality and location of lots. These variations may result in a lack of meaningful comparability between homes delivered, new contracts, net and backlog due to the changing mix between periods.
Cancellation Rates
Our cancellation rates have increased from the prior year due to the softening in the housing market and economic uncertainty. The following table sets forth the cancellation rates for each of our homebuilding segments for the three months ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
Northern | 10.8 | % | | 6.7 | % | | | | |
Southern | 14.0 | % | | 7.7 | % | | | | |
| | | | | | | |
Total cancellation rate | 12.8 | % | | 7.2 | % | | | | |
Seasonality
Typically, our homebuilding operations experience significant seasonality and quarter-to-quarter variability in homebuilding activity levels. In general, homes delivered increase substantially in the second half of the year compared to the first half of the year. We believe that this seasonality reflects the tendency of homebuyers to shop for a new home in the spring with the goal of closing in the fall or winter, as well as the scheduling of construction to accommodate seasonal weather conditions. Our financial services operations also experience seasonality because loan originations correspond with the delivery of homes in our homebuilding operations.
Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022
Northern Region. During the first quarter of 2023, homebuilding revenue in our Northern region increased $28.9 million, from $353.8 million in the first three months of 2022 to $382.7 million in the first three months of 2023. This 8% increase in homebuilding revenue was primarily the result of a 3% increase in the average sales price of homes delivered ($14,000 per home delivered), in addition to a 5% increase in the number of homes delivered (37 units) and a $0.1 million increase in land sale revenue. Operating income in our Northern region decreased $1.0 million, from $40.2 million during the first quarter of 2022 to $39.2 million during the three months ended March 31, 2023. The decrease in operating income was primarily the result of a $0.6 million decrease in our gross margin and the $0.4 million increase in selling, general and administrative expense. With respect to our homebuilding gross margin, our housing gross margin declined $0.6 million, and our housing gross margin percentage declined 160 basis points from 19.0% in the first three months of 2022 to 17.4% for the same period in 2023, primarily due to increased construction and lot costs, offset partially by the increase in average sales price of homes delivered compared to prior year. Our land sale gross margin remained flat in the first quarter of 2023 compared to the first quarter of 2022.
Selling, general and administrative expense increased $0.4 million, from $26.9 million for the three months ended March 31, 2022 to $27.3 million for the three months ended March 31, 2023, but declined as a percentage of revenue to 7.1% in the first quarter of 2023 compared to 7.6% in the same period in 2022. The increase in selling, general and administrative expense was attributable to a $1.0 million increase in selling expense primarily due to an increase in variable selling expenses resulting from increases in sales commissions produced by the higher number of homes delivered, partially offset by a $0.6 million decrease in general and administrative expense, which was primarily related to a decrease in compensation-related expenses due to our decreased headcount.
During the three months ended March 31, 2023, we experienced a 30% decrease in new contracts in our Northern region, from 1,190 in the three months ended March 31, 2022 to 828 in the first quarter of 2023. Homes in backlog also decreased 53% from 2,320 at March 31, 2022 to 1,087 homes at March 31, 2023. The decreases in new contracts and backlog were partially due to decreased demand as a result of the macroeconomic conditions described above in our Overview section and difficult comps versus last year. Average sales price in backlog increased to $515,000 at March 31, 2023 compared to $494,000 at
March 31, 2022. During the three months ended March 31, 2023, we opened 11 new communities in our Northern region compared to opening 15 during the same period in 2022. Our monthly absorption rate in our Northern region declined to 2.7 per community in the three months ended March 31, 2023 from 4.3 per community in the same period in 2022 as a result of the decrease in the number of new contracts during the period compared to prior year and the increase in the number of average active communities.
Southern Region. During the three months ended March 31, 2023, homebuilding revenue in our Southern region increased $109.6 million from $482.9 million in the first quarter of 2022 to $592.5 million in the first quarter of 2023. This 23% increase in homebuilding revenue was the result of a 9% increase in the average sales price of homes delivered ($39,000 per home delivered) and a 14% increase in the number of homes delivered (147 units), offset partially by a $3.3 million decrease in land sale revenue. Operating income in our Southern region increased 16% from $84.3 million in the first quarter of 2022 to $97.6 million during the three months ended March 31, 2023. This increase in operating income was the result of a $21.0 million improvement in our gross margin, offset partially by a $7.6 million increase in selling, general, and administrative expense. With respect to our homebuilding gross margin, our gross margin on homes delivered improved $21.9 million, due primarily to the increase in average sale price of homes delivered and the increase in the number of homes delivered during the period. Our housing gross margin percentage declined 110 basis points from 25.2% in the three months ended March 31, 2022 to 24.1% in the same period in 2023, primarily due to increased construction and lot costs, offset partially by the increase in average sales price of homes delivered compared to prior year. Our land sale gross margin declined $1.0 million in the first quarter of 2023 compared to the same period in 2022 as a result of the mix of lots sold in the current year compared to the prior year.
Selling, general and administrative expense increased $7.6 million from $37.6 million in the first quarter of 2022 to $45.2 million in the first quarter of 2023 but declined as a percentage of revenue to 7.6% from 7.8% for the first quarter of 2022. The increase in selling, general and administrative expense was attributable to a $6.6 million increase in selling expense primarily due to an increase in variable selling expenses resulting from increases in sales commissions produced by the higher number of homes delivered and a $1.0 million increase in general and administrative expense, which was primarily related to a $0.6 million increase in compensation-related expenses due to our strong financial performance and a $0.4 million increase in miscellaneous expenses.
During the three months ended March 31, 2023, we experienced a 1% increase in new contracts in our Southern region, from 1,324 in the three months ended March 31, 2022 to 1,343 in the first quarter of 2023 primarily due to the increase in our average number of communities compared to prior year. Homes in backlog decreased 31% from 3,206 homes at March 31, 2022 to 2,214 homes at March 31, 2023 due primarily to decreased demand as a result of the macroeconomic conditions described above in our Overview section and difficult comps compared to prior year. Average sales price in backlog increased from $513,000 at March 31, 2022 to $526,000 at March 31, 2023. During the three months ended March 31, 2023, we opened eight communities in our Southern region, compared to opening 16 during the first quarter of 2022. Our monthly absorption rate in our Southern region declined to 4.6 per community in the first quarter of 2023 from 5.3 per community in the first quarter of 2022 as a result of the increase in our average communities and the increase in the number of new contracts during the period compared to prior year.
Financial Services. Revenue from our mortgage and title operations increased 5% from $24.1 million in the first quarter of 2022 to $25.3 million in the first quarter of 2023 due to slightly higher margins on loans sold during the period compared to 2022's first quarter and an increase in the average loan amount from $377,000 in the three months ended March 31, 2022 to $393,000 in the three months ended March 31, 2023, offset partially by a 1% decrease in the number of loan originations from 1,271 in the first quarter of 2022 to 1,258 in the first quarter of 2023.
Our financial services segment experienced a $1.0 million increase in operating income in the first quarter of 2023 compared to the same period in 2022, which was primarily due to the increase in revenue discussed above, partially offset by a $0.1 million increase in selling, general and administrative expense compared to the first quarter of 2022. The increase in selling, general and administrative expense was primarily attributable to an increase in compensation-related expenses.
At March 31, 2023, M/I Financial provided financing services in all of our markets. Approximately 78% of our homes delivered during the first quarter of 2023 were financed through M/I Financial, compared to 82% in the first quarter of 2022. Capture rate is influenced by financing availability and can fluctuate from quarter to quarter.
Corporate Selling, General and Administrative Expense. Corporate selling, general and administrative expense increased $1.7 million from $15.5 million for the three months ended March 31, 2022 to $17.2 million for the three months ended March 31, 2023, primarily due to an increase in compensation-related expenses due to our increased headcount and our strong financial performance.
Interest Expense - Net. Interest income for the Company increased from interest expense of $0.7 million in the three months ended March 31, 2022 to interest income of $1.4 million in the three months ended March 31, 2023. This increase in interest income was primarily due to a decrease in our weighted average borrowings from $802.2 million in 2022's first quarter to $750.5 million in 2023's first quarter.
Income Taxes. Our overall effective tax rate was 24.2% for the three months ended March 31, 2023 and 24.9% for the three months ended March 31, 2022. The decrease in the effective rate from the three months ended March 31, 2022 was due to an increase in energy efficient home credits during the first quarter of 2023.
LIQUIDITY AND CAPITAL RESOURCES
Overview of Capital Resources and Liquidity.
At March 31, 2023, we had $542.6 million of cash, cash equivalents and restricted cash, with $541.2 million of this amount comprised of unrestricted cash and cash equivalents, which represents a $230.6 million increase in unrestricted cash and cash equivalents from December 31, 2022. Our principal uses of cash for the three months ended March 31, 2023 were investment in land and land development, construction of homes, mortgage loan originations, investment in joint ventures, operating expenses, short-term working capital, and debt service requirements, including the repayment of amounts outstanding under our credit facilities during the first quarter of 2023. In order to fund these uses of cash, we used proceeds from home deliveries, as well as excess cash balances, borrowings under our credit facilities, and other sources of liquidity.
The Company is a party to three primary credit agreements: (1) a $650 million unsecured revolving credit facility, dated July 18, 2013, as amended (the “Credit Facility”), with M/I Homes, Inc. as borrower and guaranteed by the Company’s wholly owned homebuilding subsidiaries; (2) a $200 million secured mortgage warehousing agreement, dated May 27, 2022, with M/I Financial as borrower (the “MIF Mortgage Warehousing Agreement”); and (3) a $90 million mortgage repurchase agreement, dated October 30, 2017, as amended most recently on October 24, 2022, with M/I Financial as borrower (the “MIF Mortgage Repurchase Facility”).
As of March 31, 2023, we had outstanding notes payable (consisting primarily of notes payable for our financial services operations, the 2030 Senior Notes and the 2028 Senior Notes) with varying maturities in an aggregate principal amount of $923.6 million, with $223.6 million payable within 12 months. Future interest payments associated with these notes payable totaled $182.1 million as of March 31, 2023, with $31.8 million payable within 12 months.
As of March 31, 2023, there were no borrowings outstanding and $73.6 million of letters of credit outstanding under our $650 million Credit Facility, leaving $576.4 million available. We expect to continue managing our balance sheet and liquidity carefully in 2023 by managing our spending on land acquisition and development and construction of inventory homes, as well as overhead expenditures, relative to our ongoing volume of home deliveries, and we expect to meet our current and anticipated cash requirements in 2023 from cash receipts, excess cash balances and availability under our credit facilities.
During the first quarter of 2023, we delivered 2,007 homes, started 1,558 homes, ended the quarter with 4,100 homes under construction versus 5,700 at the end of last year’s first quarter, and spent $45.6 million on land purchases and $92.4 million on land development.
We are selectively acquiring and developing lots in our markets to replenish our lot supply and will continue to monitor market conditions and our pace of home sales and deliveries and adjust our land spending accordingly. Pursuant to our land option agreements, as of March 31, 2023, we had a total of 16,975 lots under contract, with an aggregate purchase price of approximately $824.6 million, to be acquired during the remainder of 2023 through 2029.
Our off-balance sheet arrangements relating to our homebuilding operations include joint venture arrangements, land option agreements, guarantees and indemnifications associated with acquiring and developing land, and the issuance of letters of credit and completion bonds. We use these arrangements to secure the most desirable lots on which to build homes for our homebuyers in a manner that we believe reduces the overall risk to the Company.
Operating Cash Flow Activities. During the three-month period ended March 31, 2023, we generated $251.5 million of cash from operating activities, compared to generating $69.3 million of cash from operating activities during the first quarter of 2022. The cash generated in operating activities in the first quarter of 2023 was primarily a result of net income of $103.1 million, $19.9 million of proceeds from the sale of mortgage loans net of mortgage loan originations, a $175.3 million decrease in inventory due to decline in demand and an increase of $15.9 million in customer deposits and other liabilities, offset, in part, by an increase in accounts payable and accrued compensation totaling $59.1 million and an increase in other assets of $4.6 million. The cash generated from operating activities in 2022’s first quarter was primarily a result of net income
of $91.8 million, $69.2 million of proceeds from the sale of mortgage loans net of mortgage loan originations, and an increase in accounts payable, customer deposits and other liabilities totaling $85.8 million offset, in part, by a $129.3 million increase in inventory, a decrease in accrued compensation of $31.7 million and an increase in other assets of $25.1 million.
Investing Cash Flow Activities. During the first quarter of 2023, we used $4.8 million of cash from investing activities, compared to using $6.6 million of cash from investing activities during the first quarter of 2022. The cash used in investing activities in the first quarter of 2023 was primarily a result of a $2.7 million increase in our investment in joint venture arrangements and a $2.1 million increase in property and equipment. The cash used in investing activities during the first quarter of 2022 was primarily a result of a $5.4 million increase in our investment in joint venture arrangements.
Financing Cash Flow Activities. During the three months ended March 31, 2023, we used $15.7 million of cash from financing activities, compared to using $80.5 million of cash during the first three months of 2022. The cash used in financing activities in 2023 was primarily due to repayments of $22.1 million (net of proceeds from borrowings) under our two M/I Financial credit facilities, offset partially by $6.4 million in proceeds from the exercise of stock options during the first quarter of 2023. The cash used in financing activities in first quarter of 2022 was primarily due to repayments of $62.5 million (net of proceeds from borrowings) under our two M/I Financial credit facilities in addition to the repurchase of $15.4 million of our outstanding common shares during the first quarter of 2022.
On July 28, 2021, the Company announced that its Board of Directors authorized a new share repurchase program pursuant to which the Company may purchase up to $100 million of its outstanding common shares (the “2021 Share Repurchase Program”). On February 17, 2022, the Company announced that its Board of Directors approved an increase to its 2021 Share Repurchase Program, for a total of $200 million authorized for repurchases. As of March 31, 2023, the Company is authorized to repurchase an additional $93.1 million of outstanding common shares under the 2021 Share Repurchase Program (see Note 12 to our financial statements for more information).
The timing and amount of any future purchases under the 2021 Share Repurchase Program will be based on a variety of factors, including the market price of the Company’s common shares, business considerations, general market and economic conditions and legal requirements.
At March 31, 2023 and December 31, 2022, our ratio of homebuilding debt to capital was 24% and 25%, respectively, calculated as the carrying value of our outstanding homebuilding debt (which consists of borrowings under our Credit Facility, our 2030 Senior Notes, our 2028 Senior Notes, and Notes Payable-Other) divided by the sum of the carrying value of our outstanding homebuilding debt plus shareholders’ equity. We believe that this ratio provides useful information for understanding our financial position and the leverage employed in our operations, and for comparing us with other homebuilders.
We fund our operations with cash flows from operating activities, including proceeds from home deliveries, land sales and the sale of mortgage loans. We believe that these sources of cash, along with our balance of unrestricted cash and borrowings available under our credit facilities, will be sufficient to fund our currently anticipated working capital needs, investment in land and land development, construction of homes, operating expenses, planned capital spending, and debt service requirements for at least the next twelve months. In addition, we routinely monitor current and anticipated operational and debt service requirements, financial market conditions, and credit relationships, and we may choose to seek additional capital by issuing new debt and/or equity securities or engaging in other financial transactions to strengthen our liquidity or our long-term capital structure. The financing needs of our homebuilding and financial services operations depend on anticipated sales and home delivery volume in the current year as well as future years, inventory levels and related turnover, forecasted land and lot purchases, debt maturity dates, and other factors. If we seek such additional capital or engage in such other financial transactions, there can be no assurance that we would be able to obtain such additional capital or consummate such other financial transactions on terms acceptable to us, if at all, and such additional equity or debt financing or other financial transactions could dilute the interests of our existing shareholders, add operational limitations and/or increase our interest costs.
Included in the table below is a summary of our available sources of cash from the Credit Facility, the MIF Mortgage Warehousing Agreement and the MIF Mortgage Repurchase Facility as of March 31, 2023:
| | | | | | | | | | | |
(In thousands) | Expiration Date | Outstanding Balance | Available Amount |
Notes payable – homebuilding (a) | (a) | $ | — | | $ | 576,421 | |
Notes payable – financial services (b) | (b) | $ | 223,618 | | $ | 2,520 | |
(a)The available amount under the Credit Facility is computed in accordance with the borrowing base calculation under the Credit Facility, which applies various advance rates for different categories of inventory and totaled $1.69 billion of availability for additional senior debt at March 31, 2023. As a result, the full $650 million commitment amount of the facility was available, less any borrowings and letters of credit outstanding. There were no borrowings outstanding and $73.6 million of letters of credit outstanding at March 31, 2023, leaving $576.4 million available. The Credit Facility has an expiration date of December 9, 2026.
(b)The available amount is computed in accordance with the borrowing base calculations under the MIF Mortgage Warehousing Agreement and the MIF Mortgage Repurchase Facility, each of which may be increased by pledging additional mortgage collateral, not to exceed the maximum aggregate commitment amount of M/I Financial’s warehousing agreements, which was $290 million as of March 31, 2023. The MIF Mortgage Warehousing Agreement has an expiration date of May 26, 2023.
Notes Payable - Homebuilding.
Homebuilding Credit Facility. The Credit Facility provides for an aggregate commitment amount of $650 million and also includes an accordion feature pursuant to which the maximum borrowing availability may be increased to an aggregate of $800 million, subject to obtaining additional commitments from lenders. The Credit Facility matures on December 9, 2026. Interest on amounts borrowed under the Credit Facility is payable at multiple interest rate options, including one, three, or six month adjusted term secured overnight financing rate (“SOFR”) (subject to a floor of 0.25%) plus a margin of 175 basis points (subject to adjustment in subsequent quarterly periods based on the Company’s leverage ratio).
Borrowings under the Credit Facility constitute senior, unsecured indebtedness and availability is subject to, among other things, a borrowing base calculated using various advance rates for different categories of inventory. The Credit Facility also provides for a $250 million sub-facility for letters of credit. The Credit Facility contains various representations, warranties and covenants which require, among other things, that the Company maintain (1) a minimum level of Consolidated Tangible Net Worth of $1.36 billion at March 31, 2023 (subject to increase over time based on earnings and proceeds from equity offerings), (2) a leverage ratio not in excess of 60%, and (3) either a minimum Interest Coverage Ratio of 1.5 to 1.0 or a minimum amount of available liquidity. In addition, the Credit Facility contains covenants that limit the Company’s number of unsold housing units and model homes, as well as the amount of Investments in Unrestricted Subsidiaries and Joint Ventures (each as defined in the Credit Facility).
The Company’s obligations under the Credit Facility are guaranteed by all of the Company’s subsidiaries, with the exception of subsidiaries that are primarily engaged in the business of mortgage financing, title insurance or similar financial businesses relating to the homebuilding and home sales business, certain subsidiaries that are not 100%-owned by the Company or another subsidiary, and other subsidiaries designated by the Company as Unrestricted Subsidiaries (as defined in the Credit Facility), subject to limitations on the aggregate amount invested in such Unrestricted Subsidiaries. The guarantors for the Credit Facility are the same subsidiaries that guarantee our 2030 Senior Notes and our 2028 Senior Notes.
As of March 31, 2023, the Company was in compliance with all covenants of the Credit Facility, including financial covenants. The following table summarizes the most significant restrictive covenant thresholds under the Credit Facility and our compliance with such covenants as of March 31, 2023:
| | | | | | | | | | | | | | |
Financial Covenant | | Covenant Requirement | | Actual |
| | (Dollars in millions) |
Consolidated Tangible Net Worth | ≥ | $ | 1,363.5 | | | $ | 2,098.9 | |
Leverage Ratio | ≤ | 0.60 | | 0.09 |
Interest Coverage Ratio | ≥ | 1.5 to 1.0 | | 26.2 to 1.0 |
Investments in Unrestricted Subsidiaries and Joint Ventures | ≤ | $ | 629.7 | | | $ | 6.0 | |
Unsold Housing Units and Model Homes | ≤ | 3,074 | | | 1,038 | |
Notes Payable - Financial Services.
MIF Mortgage Warehousing Agreement. The MIF Mortgage Warehousing Agreement is used to finance eligible residential mortgage loans originated by M/I Financial. The MIF Mortgage Warehousing Agreement provides for a maximum borrowing availability of $200 million, which increased to $275 million from September 19, 2022 to November 13, 2022 and increased to
$300 million from November 14, 2022 to February 6, 2023, which are periods of expected increases in the volume of mortgage originations. The MIF Mortgage Warehousing Agreement expires on May 26, 2023. Interest on amounts borrowed under the MIF Mortgage Warehousing Agreement is payable at a per annum rate equal to the one-month BSBY rate (adjusting daily) (subject to a floor of 0.25%) plus a spread of 190 basis points.
As is typical for similar credit facilities in the mortgage origination industry, at closing, the expiration of the MIF Mortgage Warehousing Agreement was set at approximately one year and is under consideration for extension annually by the participating lenders. We expect to extend the MIF Mortgage Warehousing Agreement on or prior to the current expiration date of May 26, 2023, but we cannot provide any assurance that we will be able to obtain such an extension.
The MIF Mortgage Warehousing Agreement is secured by certain mortgage loans originated by M/I Financial that are being “warehoused” prior to their sale to investors. The MIF Mortgage Warehousing Agreement provides for limits with respect to certain loan types that can secure outstanding borrowings. There are currently no guarantors of the MIF Mortgage Warehousing Agreement.
As of March 31, 2023, there was $179.5 million outstanding under the MIF Mortgage Warehousing Agreement and M/I Financial was in compliance with all covenants thereunder. The financial covenants, as more fully described and defined in the MIF Mortgage Warehousing Agreement, are summarized in the following table, which also sets forth M/I Financial’s compliance with such covenants as of March 31, 2023:
| | | | | | | | | | | | | | |
Financial Covenant | | Covenant Requirement | | Actual |
| | (Dollars in millions) |
Leverage Ratio | ≤ | 12.0 to 1.0 | | 7.3 to 1.0 |
Liquidity | ≥ | $ | 10.0 | | | $ | 28.4 | |
Adjusted Net Income | > | $ | 0.0 | | | $ | 21.1 | |
Tangible Net Worth | ≥ | $ | 20.0 | | | $ | 34.3 | |
MIF Mortgage Repurchase Facility. The MIF Mortgage Repurchase Facility is used to finance eligible residential mortgage loans originated by M/I Financial and is structured as a mortgage repurchase facility. The MIF Mortgage Repurchase Facility provides for a maximum borrowing availability of $90 million. The MIF Mortgage Repurchase Facility expires on October 23, 2023. As is typical for similar credit facilities in the mortgage origination industry, at closing, the expiration of the MIF Mortgage Repurchase Facility was set at approximately one year, and is under consideration annually by the participating lender.
M/I Financial pays interest on each advance under the MIF Mortgage Repurchase Facility at a per annum rate equal to One-Month Term SOFR (subject to an all-in floor of 2.375% or 2.75% based on the type of loan) plus 150 or 200 basis points depending on loan type. The covenants in the MIF Mortgage Repurchase Facility are substantially similar to the covenants in the MIF Mortgage Warehousing Agreement. The MIF Mortgage Repurchase Facility provides for limits with respect to certain loan types that can secure outstanding borrowings, which are substantially similar to the restrictions in the MIF Mortgage Warehousing Agreement. There are no guarantors of the MIF Mortgage Repurchase Facility. As of March 31, 2023, there was $44.1 million outstanding under the MIF Mortgage Repurchase Facility. M/I Financial was in compliance with all financial covenants under the MIF Mortgage Repurchase Facility as of March 31, 2023.
Senior Notes.
3.95% Senior Notes. On August 23, 2021, the Company issued $300.0 million aggregate principal amount of 3.95% Senior Notes due 2030. The 2030 Senior Notes contain certain covenants, as more fully described and defined in the indenture governing the 2030 Senior Notes, which limit the ability of the Company and the restricted subsidiaries to, among other things: incur certain liens securing indebtedness without equally and ratably securing the 2030 Senior Notes and the guarantees thereof; enter into certain sale and leaseback transactions; and consolidate or merge with or into other companies, liquidate or sell or otherwise dispose of all or substantially all of the Company’s assets. These covenants are subject to a number of exceptions and qualifications as described in the indenture governing the 2030 Senior Notes. As of March 31, 2023, the Company was in compliance with all terms, conditions, and covenants under the indenture.
4.95% Senior Notes. On January 22, 2020, the Company issued $400.0 million aggregate principal amount of 4.95% Senior Notes due 2028. The 2028 Senior Notes contain certain covenants, as more fully described and defined in the indenture governing the 2028 Senior Notes, which limit the ability of the Company and the restricted subsidiaries to, among other things: incur additional indebtedness; make certain payments, including dividends, or repurchase any shares, in an aggregate amount exceeding our “restricted payments basket”; make certain investments; and create or incur certain liens, consolidate or merge with or into other companies, or liquidate or sell or transfer all or substantially all of our assets. These covenants are subject to a number of exceptions and qualifications as described in the indenture governing the 2028 Senior Notes. As of March 31, 2023, the Company was in compliance with all terms, conditions, and covenants under the indenture.
See Note 8 to our financial statements for more information regarding the 2030 Senior Notes and the 2028 Senior Notes. Supplemental Financial Information.
As of March 31, 2023, M/I Homes, Inc. had $300.0 million aggregate principal amount of its 2030 Senior Notes and $400.0 million aggregate principal amount of its 2028 Senior Notes outstanding.
The 2030 Senior Notes and the 2028 Senior Notes are fully and unconditionally guaranteed, on a joint and several basis, by all of M/I Homes, Inc.’s subsidiaries (the “Subsidiary Guarantors”) with the exception of subsidiaries that are primarily engaged in the business of mortgage financing, title insurance or similar financial businesses relating to the homebuilding and home sales business, certain subsidiaries that are not 100%-owned by M/I Homes, Inc. or another subsidiary, and other subsidiaries designated as Unrestricted Subsidiaries (as defined in the indentures governing the 2030 Senior Notes and the 2028 Senior Notes), subject to limitations on the aggregate amount invested in such Unrestricted Subsidiaries in accordance with the terms of the Credit Facility and the indentures governing the 2030 Senior Notes and the 2028 Senior Notes (the “Non-Guarantor Subsidiaries”). The Subsidiary Guarantors of the 2030 Senior Notes, the 2028 Senior Notes and the Credit Facility are the same.
Each Subsidiary Guarantor is a direct or indirect 100%-owned subsidiary of M/I Homes, Inc. The guarantees are senior unsecured obligations of each Subsidiary Guarantor and rank equally in right of payment with all existing and future unsecured senior indebtedness of such Subsidiary Guarantor. The guarantees are effectively subordinated to any existing and future secured indebtedness of such Subsidiary Guarantor with respect to any assets comprising security or collateral for such indebtedness.
The guarantees are “full and unconditional,” as those terms are used in Regulation S-X, Rule 3-10(b)(3), except that the indentures governing the 2030 Senior Notes and the 2028 Senior Notes provide that a Subsidiary Guarantor’s guarantee will be released if: (1) all of the assets of such Subsidiary Guarantor have been sold or otherwise disposed of in a transaction in compliance with the terms of the applicable indenture; (2) all of the Equity Interests (as defined in the applicable indenture) held by M/I Homes, Inc. and the Restricted Subsidiaries (as defined in the applicable Indenture) of such Subsidiary Guarantor have been sold or otherwise disposed of to any person other than M/I Homes, Inc. or a Restricted Subsidiary in a transaction in compliance with the terms of the applicable indenture; (3) the Subsidiary Guarantor is designated an Unrestricted Subsidiary (or otherwise ceases to be a Restricted Subsidiary (including by way of liquidation or merger)) in compliance with the terms of the applicable indenture; (4) M/I Homes, Inc. exercises its legal defeasance option or covenant defeasance option under the applicable indenture; or (5) all obligations under the applicable indenture are discharged in accordance with the terms of the applicable indenture.
The enforceability of the obligations of the Subsidiary Guarantors under their guarantees may be subject to review under applicable federal or state laws relating to fraudulent conveyance or transfer, voidable preference and similar laws affecting the rights of creditors generally. In certain circumstances, a court could void the guarantees, subordinate amounts owing under the guarantees or order other relief detrimental to the holders of the 2030 Senior Notes and the 2028 Senior Notes.
The following tables present summarized financial information on a combined basis for M/I Homes, Inc. and the Subsidiary Guarantors. Transactions between M/I Homes, Inc. and the Subsidiary Guarantors have been eliminated and the summarized financial information does not reflect M/I Homes, Inc.’s or the Subsidiary Guarantors’ investment in, and equity in earnings from, the Non-Guarantor Subsidiaries.
Summarized Balance Sheet Data
| | | | | | | | |
(In thousands) | As of March 31, 2023 | As of December 31, 2022 |
Assets: | | |
Cash | $ | 511,598 | | $ | 269,071 | |
Investment in joint venture arrangements | $ | 43,378 | | $ | 45,907 | |
Amounts due from Non-Guarantor Subsidiaries | $ | 7,718 | | $ | 15,772 | |
Total assets | $ | 3,457,031 | | $ | 3,379,932 | |
| | |
Liabilities and Shareholders’ Equity | | |
| | |
Total liabilities | $ | 1,327,614 | | $ | 1,359,951 | |
Shareholders’ equity | $ | 2,129,417 | | $ | 2,019,981 | |
Summarized Statement of Income Data
| | | | | |
| Three Months Ended |
(In thousands) | March 31, 2023 |
Revenues | $ | 975,250 | |
Land and housing costs | $ | 765,904 | |
Selling, general and administrative expense | $ | 89,426 | |
Income before income taxes | $ | 123,636 | |
Net income | $ | 93,012 | |
Weighted Average Borrowings. For the three months ended March 31, 2023 and 2022, our weighted average borrowings outstanding were $750.5 million and $802.2 million, respectively, with a weighted average interest rate of 5.26% and 4.72%, respectively. The decrease in our weighted average borrowings related to decreased borrowings under our two M/I Financial credit facilities during the first quarter of 2023 compared to the same period in 2022. The increase in our weighted average borrowing rate was due to higher interest rates on our credit facilities in 2023 compared to the prior year.
At both March 31, 2023 and December 31, 2022, we had no borrowings outstanding under the Credit Facility. Based on our currently anticipated spending on home construction, overhead expenses and land acquisition and development during the remainder of 2023, offset by expected cash receipts from home deliveries and other sources, we do not expect to incur borrowings under the Credit Facility during the remainder of 2023. To the extent we elect to borrow under the Credit Facility during the remainder of 2023, the actual amount borrowed and the related timing will be subject to numerous factors, which are subject to significant variation as a result of the timing and amount of land and house construction expenditures, payroll and other general and administrative expenses, and cash receipts from home deliveries. The amount borrowed will also be impacted by other cash receipts and payments, any capital markets transactions or other additional financings by the Company, any repayments or redemptions of outstanding debt, any share repurchases under the 2021 Share Repurchase Program and any other extraordinary events or transactions. The Company may also experience significant variation in cash and Credit Facility balances from week to week due to the timing of such receipts and payments.
There were $73.6 million of letters of credit issued and outstanding under the Credit Facility at March 31, 2023. During the three months ended March 31, 2023, the average daily amount of letters of credit outstanding under the Credit Facility was $83.3 million and the maximum amount of letters of credit outstanding under the Credit Facility was $94.9 million.
At March 31, 2023, M/I Financial had $179.5 million outstanding under the MIF Mortgage Warehousing Agreement. During the three months ended March 31, 2023, the average daily amount outstanding under the MIF Mortgage Warehousing Agreement was $20.0 million and the maximum amount outstanding was $200.9 million, which occurred during January 2023 while the temporary increase provision was in effect and the maximum borrowing availability was $300.0 million.
At March 31, 2023, M/I Financial had $44.1 million outstanding under the MIF Mortgage Repurchase Facility. During the three months ended March 31, 2023, the average daily amount outstanding under the MIF Mortgage Repurchase Facility was $30.5 million and the maximum amount outstanding was $47.1 million, which occurred during January 2023.
Universal Shelf Registration. In June 2022, the Company filed a universal shelf registration statement with the SEC, which registration statement became effective upon filing and will expire in June 2025. Pursuant to the registration statement, the Company may, from time to time, offer debt securities, common shares, preferred shares, depositary shares, warrants to purchase debt securities, common shares, preferred shares, depositary shares or units of two or more of those securities, rights to purchase debt securities, common shares, preferred shares or depositary shares, stock purchase contracts and units. The timing and amount of offerings, if any, will depend on market and general business conditions.
INTEREST RATES AND INFLATION
Our business is significantly affected by general economic conditions within the United States and, particularly, by the impact of interest rates and inflation. The annual rate of inflation in the United States was approximately 5% in March 2023, as measured by the Consumer Price Index (CPI), down from 6.5% in December 2022 and down from 9.1% in June 2022 (which was the highest inflation rate experienced in 40 years). As a result of the high inflation rates during 2022, we experienced an increase in the costs of land, materials and labor that we have been able to pass along to the consumer. However, inflation has also reduced the purchasing power of potential homebuyers and has negatively impacted their ability and desire to buy a home and our ability to pass along our increased costs to our homebuyers.
Beginning in the second half of 2022, the pace of sales across the homebuilding industry declined significantly from the unprecedented levels experienced in the two years prior as a result of the sharp increase in mortgage interest rates from approximately 3% in December 2021 to around 6.5% at the end of 2022, the highest rates in over a decade, as well as significant inflation in the broader economy, and the substantial rise in home prices. Interest rates have increased even further in 2023 to approximately 7% in March 2023. These macroeconomic trends have pressured housing affordability, negatively impacted homebuyer sentiment and impacted the costs of financing land development activities and housing construction. The higher mortgage interest rates and the high rate of inflation are making it more difficult for homebuyers to qualify for mortgages or to obtain mortgages at interest rates that are acceptable to them. Rising interest rates, as well as increased materials and labor costs, can also reduce gross margins.