M/I HOMES, INC. 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 135,000 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 inColumbus andCincinnati, Ohio ;Indianapolis, Indiana ;Chicago, Illinois ;Minneapolis/St. Paul, Minnesota ;Detroit, Michigan ;Tampa ,Sarasota andOrlando, Florida ;Austin ,Dallas/Fort Worth ,Houston andSan Antonio, Texas ;Charlotte andRaleigh, North Carolina ; andNashville, 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; •Summary of Our Contractual Obligations; •Discussion of Our Utilization of Off-Balance Sheet Arrangements; 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 theSecurities 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, the impact of the COVID-19 pandemic, 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 endedDecember 31, 2020 (the "2020 Form 10-K"), as the same may be updated from time to time in our subsequent filings with theSEC , 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. 23 -------------------------------------------------------------------------------- APPLICATION OF CRITICAL ACCOUNTING ESTIMATES AND POLICIES The preparation of financial statements in conformity with accounting principles generally accepted inthe 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 2020 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 endedSeptember 30, 2021 as compared to those disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our 2020 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 SouthernChicago, Illinois Orlando, Florida Cincinnati, Ohio Sarasota, Florida Columbus, Ohio Tampa, Florida Indianapolis, Indiana Austin, Texas Minneapolis/St. Paul, Minnesota Dallas/Fort Worth, Texas Detroit, Michigan Houston, Texas San Antonio, Texas Charlotte, North Carolina Raleigh, North Carolina InOctober 2021 , we announced our entry into theNashville, Tennessee market. Overview For both the third quarter and nine months endedSeptember 30, 2021 , we achieved record levels of revenue, income before income taxes and number of homes in backlog. For the nine months endedSeptember 30, 2021 , we achieved all-time records for income before income taxes, net income and backlog sales value. In addition, our financial services operations achieved year-to-date records for revenue, income before income taxes and number of loans originated. During the third quarter, we believe that the homebuilding industry continued to benefit from low interest rates, a continued undersupply of available homes and increased demand for single family homes in suburban locations. However, our number of new contracts for the three months endedSeptember 30, 2021 declined 33% from the third quarter of 2020 due to several factors, including (1) a reduction in the number of our average selling communities to 176 in 2021 from 214 in 2020, (2) limitations we imposed on sales in a majority of our communities in order to match our production timelines and lot availability, (3) the record sales pace we achieved in the third quarter of 2020, and (4) a reversion toward a more typical sales pace and seasonality. In addition, while our income before income taxes for the third quarter was a record, we continued to experience construction delays and supply chain challenges which have impacted the homebuilding industry and many of our product manufacturers, including raw material availability, extension of product lead times, labor and transportation issues, and overall demand outpacing production or shipping capacities. These challenges have resulted in a significant increase in our build cycle times, which we expect to continue for the foreseeable future, and led, in part, to our home deliveries for the third quarter declining 4% compared to 2020's third quarter. Despite these challenges, demand for new homes remains strong and continues to outstrip supply, even as the housing market reverts back to a more traditional seasonality, and we ended the quarter with an all-time record sales backlog value of$2.5 billion . 24 -------------------------------------------------------------------------------- During the third quarter and nine months endedSeptember 30, 2021 , we achieved the following results in comparison to the third quarter and nine months endedSeptember 30, 2020 : •New contracts decreased 33% to 1,964 from 2,949 and increased 1% to 7,340 from 7,299, respectively •Homes delivered decreased 4% to 2,045 homes and increased 16% to 6,322 homes, respectively •Number of homes in backlog atSeptember 30, 2021 increased 20% to a third-quarter record 5,407 homes •Total sales value in backlog increased 40% to$2.5 billion , an all-time record •Revenue increased 7% to$904.3 million (a third-quarter record) and 26% to$2.7 billion , respectively •Income before income taxes increased 22% to$116.2 million (a third-quarter record) and 77% to$367.8 million (an all-time record), respectively •Net income increased 24% to$91.0 million and 77% to$283.5 million (an all-time record), respectively In addition to the results described above, our financial services operations also achieved record income before income taxes for the nine months endedSeptember 30, 2021 , benefiting from the number of mortgages originated and higher margins, as well as technology enabled efficiencies. Our company-wide absorption pace of sales per community for the third quarter of 2021 declined to 3.7 per month compared to the record pace of 4.6 per month for the prior year's third quarter as a result of the decline in our active communities and a reversion to more traditional seasonality and demand compared to prior year and the decrease in the number of new contracts during the quarter compared to prior year. Partially as a result of the accelerated sales pace we experienced in 2020 and during the first half of 2021, our number of active communities declined to 176 from 207 at the end of the third quarter of 2020. We believe we maintain a strong land position, and we continue to place additional land under contract for communities that will be brought online in future periods. However, delays in our ability to replace existing communities that are selling out in the short-term could negatively impact our number of active communities throughout the remainder of 2021 and into 2022, given land development challenges and delays in approvals for entitlements and permits due to volume, COVID-19 related factors or other delays. We continue to work to open new communities to grow our community count. We are also actively managing sales pace, in part by selectively increasing prices and limiting sales in the majority of our communities, to optimize our availability of lots and maximize returns, while also maintaining a manageable timeline for construction and delivery of our homes. InAugust 2021 , we issued$300.0 million aggregate principal amount of 3.95% Senior Notes due 2030 (the "2030 Senior Notes") for net proceeds of approximately$296.0 million . We used$257.9 million of the net proceeds from this offering to redeem all$250.0 million aggregate principal amount of our outstanding 5.625% Senior Notes due 2025 (the "2025 Senior Notes") at a redemption price of 102.813% of the principal amount, plus accrued and unpaid interest thereon. In association with the early redemption of our 2025 Senior Notes, we incurred a$9.1 million loss on early extinguishment of debt, consisting of a$7.1 million prepayment premium due to early redemption and$2.0 million for the write-off of unamortized debt issuance costs.
Summary of Company Financial Results
Income before income taxes for the third quarter of 2021 increased 22% from$95.1 million in the third quarter of 2020 to a third quarter record$116.2 million in 2021. For the nine months endedSeptember 30, 2021 , income before income taxes increased 77% from$208.2 million for the nine months endedSeptember 30, 2020 to an all-time record$367.8 million . We achieved net income of$91.0 million ($3.03 per diluted share), in 2021's third quarter, a 24% increase, or$17.5 million , from net income of$73.5 million ($2.51 per diluted share), in 2020's third quarter. Our effective tax rate was 21.7% in 2021's third quarter compared to 22.7% in 2020. For the nine months endedSeptember 30, 2021 , we achieved an all-time record net income of$283.5 million , or$9.46 per diluted share, compared to net income of$159.8 million , or$5.50 per diluted share, in the nine months endedSeptember 30, 2020 . Our effective tax rate was 22.9% in 2021's first nine months compared to 23.3% in the same period in 2020. Income before income taxes and net income for the third quarter and first nine months of 2021 was unfavorably impacted by a$9.1 million pre-tax charge for loss on early extinguishment of debt related to the redemption of our 2025 Senior Notes (as described above). During the quarter endedSeptember 30, 2021 , we recorded third-quarter record total revenue of$904.3 million , of which$878.6 million was from homes delivered,$4.9 million was from land sales and$20.8 million was from our financial services operations. Revenue from homes delivered increased 8% in 2021's third quarter compared to the same period in 2020 driven primarily by a 13% increase in the average sales price of homes delivered ($50,000 per home delivered), which was primarily the result of strong demand, partially offset by a 4% decrease in the number of homes delivered (92 units) which was due to construction and supply chain issues that created delays in home closings. Revenue from land sales decreased$1.1 million from the third quarter of 2020 due to fewer land sales in 2021's third quarter compared to the prior year. Revenue from our financial services segment decreased 28% to$20.8 million in the third quarter of 2021 as a result of a decrease in loans closed 25 -------------------------------------------------------------------------------- and sold as well as lower margins on loans sold during the period compared to the third quarter of 2020, which was a record quarter and therefore provided difficult comparisons for the third quarter 2021. For the nine months endedSeptember 30, 2021 , we recorded year-to-date record total revenue of$2.7 billion , of which$2.6 billion was from homes delivered,$10.7 million was from land sales and$79.1 million was from our financial services operations. Revenue from homes delivered increased 26% in the nine months endedSeptember 30, 2021 compared to the same period in 2020 driven primarily by a 16% increase in the number of homes delivered (855 units) and a 9% increase in the average sales price of homes delivered ($34,000 per home delivered). Revenue from land sales decreased$0.4 million from the nine months endedSeptember 30, 2020 due to fewer land sales in 2021's first nine months compared to the prior year. Revenue from our financial services segment increased 29% to$79.1 million in the first nine months of 2021 as a result of an increase in loans closed and sold in the first nine months of 2021, in addition to higher margins on loans sold during the period compared to the prior year. Total gross margin (total revenue less total land and housing costs) increased$27.2 million in the third quarter of 2021 compared to the third quarter of 2020 as a result of a$35.4 million improvement in the gross margin of our homebuilding operations, offset partially by an$8.2 million decrease 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) improved$34.2 million primarily as a result of the 13% increase in average sales price of homes delivered, partially offset by the 4% decrease in the number of homes delivered. Our housing gross margin percentage improved 240 basis points from 20.3% in prior year's third quarter to 22.7% in 2021's third quarter, primarily as a result of strong demand during 2021's third quarter and increased average sales prices. Our gross margin on land sales (land sale gross margin) improved$1.2 million in the third quarter of 2021 compared to the third quarter of 2020. The gross margin of our financial services operations decreased$8.2 million in the third quarter of 2021 compared to the third quarter of 2020 as a result of a decrease in the number of loan originations and lower margins on loans sold, partially offset by an increase in the average loan amount during the third quarter of 2021 compared to the third quarter of 2020. Total gross margin increased$197.7 million in the nine months endedSeptember 30, 2021 compared to the same period in 2020 as a result of a$180.1 million improvement in the gross margin of our homebuilding operations and a$17.6 million improvement in the gross margin of our financial services operations. With respect to our homebuilding gross margin, our gross margin on homes delivered improved$177.8 million as a result of the 16% increase in the number of homes delivered and the 9% increase in the average sales price of homes delivered. Our housing gross margin percentage improved 280 basis points from 19.6% in prior year's first nine months to 22.4% in 2021's first nine months, primarily as a result of strong demand during the period. Our gross margin on land sales improved$2.3 million in 2021's first nine months compared to the same period in 2020. The gross margin of our financial services operations increased$17.6 million in the nine months endedSeptember 30, 2021 compared to the same period in 2020 as a result of increases in the number of loan originations, in addition to higher margins on loans sold during the first nine months of 2021 compared to the nine months endedSeptember 30, 2020 . 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. As a result of the record number of sales in 2020 and during the first nine months of 2021, we are selling through communities faster, which has negatively impacted our number of active communities. We opened 63 new communities during the nine months endedSeptember 30, 2021 and closed out of 89 communities. For the three months endedSeptember 30, 2021 , selling, general and administrative expense decreased$1.9 million , which aided the increase in our gross margin dollars discussed above, and declined as a percentage of revenue from 11.6% in the third quarter of 2020 to 10.7% in the third quarter of 2021 (a third quarter record). Selling expense decreased$2.4 million from 2020's third quarter and improved as a percentage of revenue to 5.2% in 2021's third quarter from 5.8% for the same period in 2020. Variable selling expense for sales commissions contributed$1.0 million to the decrease due to the lower number of homes delivered in the quarter. The decrease in selling expense was also attributable to a$1.4 million decrease in non-variable selling expense primarily related to decreased costs associated with our sales offices and models as a result of our decreased community count. General and administrative expense increased$0.5 million compared to the third quarter of 2020 but declined as a percentage of revenue from 5.8% in the third quarter of 2020 to 5.5% in the third quarter of 2021. The dollar increase in general and administrative expense was primarily due to an increase in compensation-related expenses due to our increased headcount and our strong financial performance during the quarter. For the nine months endedSeptember 30, 2021 , selling, general and administrative expense increased$35.8 million , which partially offset the increase in our gross margin dollars discussed above, but declined as a percentage of revenue from 11.7% in the nine months endedSeptember 30, 2020 to 10.7% in the nine months endedSeptember 30, 2021 . Selling expense increased$15.9 million from the nine months endedSeptember 30, 2020 but improved as a percentage of revenue to 5.3% in 2021's first nine months from 6.0% for the same period in 2020. Variable selling expense for sales commissions contributed$16.5 million to the increase due to the higher number of homes delivered during the first nine months of 2021. The increase in selling expense was partially offset by a$0.6 million decrease in non-variable selling expense primarily related to decreased costs associated with our sales offices and models as a result of our decreased community count. General and administrative expense increased$19.9 million compared to the nine months endedSeptember 30, 2020 but declined as a percentage of revenue from 5.8% in the nine months endedSeptember 30 , 26 -------------------------------------------------------------------------------- 2020 to 5.3% in the nine months endedSeptember 30, 2021 . The dollar increase in general and administrative expense was primarily due to a$16.6 million increase in compensation-related expenses due to our increased headcount and our strong financial performance during the period, a$1.2 million increase in computer costs related to our investment in new information systems, a$1.1 million increase in land-related expenses, a$0.5 million increase in charitable contributions, and a$0.5 million increase in miscellaneous expenses. Outlook We believe that new home sales will continue to benefit from low interest rates, a continued undersupply of available homes and consumer demographics, including a growing number of millennial homebuyers. However, we expect a reversion to a more traditional seasonal sales pace than the pace we experienced in the final half of 2020 and the first half of 2021. In addition, the supply chain for various materials and labor for both land development (which impacts new communities and lot availability in existing communities) and home construction is experiencing substantial challenges and delays, causing us to limit our sales in a majority of communities to match our production timelines. As a result, we expect that the industry will not be able to quickly remedy the supply shortage of new homes with increased production and is likely to continue to experience extended build cycles and home delivery timelines. Accordingly, we remain focused on managing our sales pace closely with our ability to build and deliver homes, while balancing price appreciation as an offset to further cost escalations in order to maintain margins. In the first nine months of 2021, we continued to experience cost increases in certain construction materials, and we continue to actively manage and monitor those costs. We have been able to raise home prices in many of our communities to offset these cost increases and preserve or increase our margins. During the third quarter, our ability to raise prices, together with cost management and lower lumber prices, allowed us to achieve a total gross margin percentage of 24.5%, an improvement of 160 basis points compared with 2020's third quarter. We may experience future shortages in materials and labor as well as price increases for materials and labor and may not be able to maintain our current level of direct construction costs as a percentage of average sales price. We remain sensitive to changes in market conditions, and continue to focus on controlling overhead leverage and carefully managing our investment in land and land development spending. We expect to emphasize the following strategic business objectives throughout the remainder of 2021 and into 2022: •managing our land spend and inventory levels; •manage our community sales pace to maximize returns; •accelerating the readiness of new communities wherever possible; •maintaining a strong balance sheet and liquidity levels; •expanding the availability of our more affordable Smart Series homes; and •emphasizing customer service, product quality and design, and premier locations. During the nine months endedSeptember 30, 2021 , we invested$473.8 million in land acquisitions and$281.2 million in land development. 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 spending and investment in inventory homes accordingly. As a result of the uncertainty of the current environment, and complexity of land transactions, including zoning and approvals, along with timing of development, we are not providing land spending estimates for 2021 at this time. As ofSeptember 30, 2021 , we had approximately 43,000 lots under control, which represents a 9% increase from our approximately 39,600 lots under control at the end of last year's third quarter. We opened 63 communities and closed 89 communities in the nine months endedSeptember 30, 2021 , ending the third quarter with a total of 176 communities, compared to 207 at the end of last year's third quarter. Of our total communities at the end of the third quarter of 2021, 70 offered our more affordable Smart Series designs, which are primarily designed for first-time homebuyers. We are actively managing our sales pace to optimize our availability of lots and maximize financial returns, while also maintaining a manageable timeline for construction and delivery of our homes. The specific timing of closing out communities has been faster than anticipated and difficult to project throughout 2021. However, based on our planned community openings in the fourth quarter of 2021 and during 2022, we estimate that our community count will increase in 2022, ending the year with between 200 and 220 active communities. We believe our ability to design and develop attractive homes in desirable locations at an affordable cost, and to grow our business while also leveraging our fixed costs, has enabled us to maintain and improve our strong financial results. We further believe that we are well positioned with a strong balance sheet to manage through the current economic environment. 27 -------------------------------------------------------------------------------- The following table shows, by segment, revenue; gross margin; selling, general and administrative expense; operating income (loss); and interest expense for the three and nine months endedSeptember 30, 2021 and 2020: Three Months EndedSeptember 30 , Nine
Months Ended
(In thousands) 2021 2020 2021 2020
Revenue:
Northern homebuilding
Southern homebuilding 482,960 468,384
1,463,707 1,188,056
Financial services (a) 20,795 28,946 79,079 61,461 Total revenue$ 904,319 $ 847,921 $ 2,694,135 $ 2,139,718 Gross margin:
Northern homebuilding
246,674
Southern homebuilding 112,750 97,924 339,560 238,865 Financial services (a) 20,795 28,946 79,079 61,461 Total gross margin$ 221,754 $ 194,514 $
665,313
Selling, general and
administrative expense:
Northern homebuilding
86,699
Southern homebuilding 39,793 42,063 121,324 109,828 Financial services (a) 9,975 9,059 28,698 23,755 Corporate 17,566 18,017 50,361 41,891
Total selling, general and
administrative expense
287,082
Operating income (loss):
Northern homebuilding
159,975
Southern homebuilding 72,957 55,861 218,236 129,037 Financial services (a) 10,820 19,887 50,381 37,706
Less: Corporate selling,
general and administrative
expense (17,566) (18,017)
(50,361) (41,891)
Total operating income
378,231
Interest (income) expense:
Northern homebuilding $ -
76
Southern homebuilding (381) 409 (224) 3,759 Financial services (a) 885 708 2,777 2,059 Corporate (578) - (1,075) -
Total interest (income)
expense$ (74) $ 1,239 $
1,554
Equity in loss (income) of
joint venture arrangements 50 (252) (145) (307)
Loss on early extinguishment
of debt 9,072 - 9,072 - Income before income taxes$ 116,172 $ 95,109 $ 367,750$ 208,192 (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 homebuying customers, with the exception of a small amount of mortgage refinancing. 28 -------------------------------------------------------------------------------- The following tables show total assets by segment atSeptember 30, 2021 andDecember 31, 2020 : At September 30, 2021 Corporate, Financial Services (In thousands) Northern Southern and Unallocated Total Deposits on real estate under option or contract$ 4,079 $ 44,521 $ -$ 48,600 Inventory (a) 950,220 1,354,323 - 2,304,543 Investments in joint venture arrangements - 42,466 - 42,466 Other assets 40,229 72,983 (b) 537,779 650,991 Total assets$ 994,528 $ 1,514,293 $ 537,779 $ 3,046,600 At December 31, 2020 Corporate, Financial Services (In thousands) Northern Southern and Unallocated Total Deposits on real estate under option or contract$ 5,031 $ 40,326 $ -$ 45,357 Inventory (a) 847,524 1,023,727 - 1,871,251 Investments in joint venture arrangements 1,378 33,295 - 34,673 Other assets 37,465 57,588 (b) 596,711 691,764 Total assets$ 891,398 $ 1,154,936 $ 596,711 $ 2,643,045 (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. 29 -------------------------------------------------------------------------------- Reportable Segments The following table presents, by reportable segment, selected operating and financial information as of and for the three and nine months endedSeptember 30, 2021 and 2020: Three Months Ended September 30, Nine Months Ended September 30, (Dollars in thousands) 2021 2020 2021 2020 Northern Region Homes delivered 876 868 2,638 2,190 New contracts, net 772 1,176 2,962 2,951 Backlog at end of period 2,139 1,904 2,139 1,904 Average sales price of homes delivered $ 454$ 402 $ 435$ 405 Average sales price of homes in backlog $ 475$ 427 $ 475$ 427 Aggregate sales value of homes in backlog$ 1,014,981 $ 813,909 $ 1,014,981 $ 813,909 Housing revenue $ 397,922$ 348,774 $ 1,146,977 $ 887,662 Land sale revenue $ 2,642$ 1,817 $ 4,372$ 2,539 Operating income homes (a) $ 58,225$ 38,308 $ 158,859$ 91,385 Operating income land $ 784$ 57 $ 1,116$ 102 Number of average active communities 82 90 85 94 Number of active communities, end of period 85 86 85 86 Southern Region Homes delivered 1,169 1,269 3,684 3,277 New contracts, net 1,192 1,773 4,378 4,348 Backlog at end of period 3,268 2,599 3,268 2,599 Average sales price of homes delivered $ 411$ 366 $ 396$ 360 Average sales price of homes in backlog $ 468$ 387 $ 468$ 387 Aggregate sales value of homes in backlog$ 1,530,983 $ 1,005,322 $ 1,530,983 $ 1,005,322 Housing revenue $ 480,680$ 464,225 $ 1,457,410 $ 1,179,486 Land sale revenue $ 2,280$ 4,159 $ 6,297$ 8,570 Operating income homes (a) $ 72,396$ 55,731 $ 216,831$ 128,888 Operating income land $ 561$ 130 $ 1,405$ 149 Number of average active communities 94 124 100 125 Number of active communities, end of period 91 121 91 121 Total Homebuilding Regions Homes delivered 2,045 2,137 6,322 5,467 New contracts, net 1,964 2,949 7,340 7,299 Backlog at end of period 5,407 4,503 5,407 4,503 Average sales price of homes delivered $ 430$ 380 $ 412$ 378 Average sales price of homes in backlog $ 471$ 404 $ 471$ 404 Aggregate sales value of homes in backlog$ 2,545,964 $ 1,819,231 $ 2,545,964 $ 1,819,231 Housing revenue $ 878,602$ 812,999 $ 2,604,387 $ 2,067,148 Land sale revenue $ 4,922$ 5,976 $ 10,669$ 11,109 Operating income homes (a) $ 130,621$ 94,039 $ 375,690$ 220,273 Operating income land $ 1,345$ 187 $ 2,521$ 251 Number of average active communities 176 214 185 219 Number of active communities, end of period 176 207 176 207
(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 September 30, Nine Months Ended September 30,
(Dollars in thousands) 2021 2020 2021 2020
Financial Services
Number of loans originated 1,554 1,636 4,833 4,142
Value of loans originated $ 542,555 $
513,456
Revenue$ 20,795 $ 28,946 $ 79,079$ 61,461 Less: Selling, general and administrative expenses 9,975 9,059 28,698 23,755 Less: Interest expense 885 708 2,777 2,059 Income before income taxes$ 9,935 $ 19,179 $ 47,604$ 35,647 30
-------------------------------------------------------------------------------- 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 The following table sets forth the cancellation rates for each of our homebuilding segments for the three and nine months endedSeptember 30, 2021 and 2020: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Northern 8.2 % 8.2 % 6.7 % 9.7 % Southern 7.5 % 10.4 % 7.7 % 12.6 % Total cancellation rate 7.8 % 9.5 % 7.3 % 11.5 % 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. Additionally, given the disruption in economic activity caused by the COVID-19 pandemic, and the uneven impact of the recovery on housing sales, our results for the nine months endedSeptember 30, 2021 are not necessarily indicative of the results that we may achieve in future periods. Year Over Year Comparison Three Months EndedSeptember 30, 2021 Compared to Three Months EndedSeptember 30, 2020 Northern Region . During the three months endedSeptember 30, 2021 , homebuilding revenue in our Northern region increased$50.0 million , from$350.6 million in the third quarter of 2020 to$400.6 million in the third quarter of 2021. This 14% increase in homebuilding revenue was primarily the result of a 13% increase in the average sales price of homes delivered ($52,000 per home delivered) and a 1% increase in the number of homes delivered (8 units) which were due to increased demand during the period. Operating income in our Northern region increased$20.6 million from$38.4 million in the third quarter of 2020 to$59.0 million during the quarter endedSeptember 30, 2021 . This increase in operating income was the result of a$20.5 million improvement in our gross margin in addition to a$0.1 million decrease in selling, general and administrative expense. With respect to our homebuilding gross margin, our housing gross margin improved$19.8 million primarily due to the increase in average sales price of homes delivered and the slight increase in the number of homes delivered noted above. Our housing gross margin percentage improved 260 basis points to 22.0% in the third quarter of 2021 from 19.4% in the prior year's third quarter. The improvement in housing gross margin percentage was primarily due to increased demand during the period. Our land sale gross margin increased$0.7 million in the third quarter of 2021 compared to the same period in 2020 due to more land sales during the period. Selling, general and administrative expense decreased$0.1 million , from$29.3 million for the quarter endedSeptember 30, 2020 to$29.2 million for the quarter endedSeptember 30, 2021 , and improved as a percentage of revenue to 7.3% in 2021's third quarter from 8.4% in 2020's third quarter. The decrease in selling, general and administrative expense was attributable, in part, to a$0.3 million decrease in general and administrative expense primarily related to a decrease in land-related expenses which was partially offset by a$0.2 million increase in selling expense. The increase in selling expense was due to a$0.5 million increase in variable selling expenses resulting from increases in sales commissions produced by the higher number of homes delivered, partially offset by a$0.3 million decrease in non-variable selling expenses primarily related to a decrease in advertising costs. 31 -------------------------------------------------------------------------------- During the three months endedSeptember 30, 2021 , we experienced a 34% decrease in new contracts in our Northern region, from 1,176 in the third quarter of 2020 to 772 in the third quarter of 2021 primarily due to our decreased community count. Homes in backlog increased 12% from 1,904 homes atSeptember 30, 2020 to 2,139 homes atSeptember 30, 2021 and average sales price in backlog increased to$475,000 atSeptember 30, 2021 compared to$427,000 atSeptember 30, 2020 which was primarily due to strong demand. During the three months endedSeptember 30, 2021 , we opened 14 new communities in our Northern region compared to opening five communities during 2020's third quarter. Our monthly absorption rate in our Northern region declined to 3.1 per community in the third quarter of 2021 compared to 4.4 per community in 2020's third quarter due to the decline in new contracts during the quarter.Southern Region . During the three month period endedSeptember 30, 2021 , homebuilding revenue in our Southern region increased$14.6 million , from$468.4 million in the third quarter of 2020 to$483.0 million in the third quarter of 2021. This 3% increase in homebuilding revenue was the result of a 12% increase in the average sales price of homes delivered ($45,000 per home delivered) which was due to strong demand, offset partially by an 8% decrease in the number of homes delivered (100 units) which was due to construction and supply chain issues that created delays in closings. Operating income in our Southern region increased$17.1 million from$55.9 million in the third quarter of 2020 to$73.0 million during the quarter endedSeptember 30, 2021 . This increase in operating income was the result of a$14.8 million improvement in our gross margin in addition to a$2.3 million decrease in selling, general, and administrative expense. With respect to our homebuilding gross margin, our housing gross margin improved$14.4 million , due primarily to the increase in average sales price of homes delivered, offset partially by the decrease in the number of homes delivered noted above. Our housing gross margin percentage improved from 21.1% in prior year's third quarter to 23.3% in the third quarter of 2021, largely due to the more affordable mix of communities delivering homes and strong demand. Our land sale gross margin improved$0.4 million in the third quarter of 2021 compared to the third quarter of 2020. We did not record any additional warranty charges for stucco-related repair costs in ourFlorida communities during the third quarter of 2021. With respect to this matter, during the quarter endedSeptember 30, 2021 , we identified 21 additional homes in need of repair and completed repairs on 38 homes, and, at September 30, 2021, we have 83 homes in various stages of repair. See Note 6 to our financial statements for further information. Selling, general and administrative expense decreased$2.3 million from$42.1 million in the third quarter of 2020 to$39.8 million in the third quarter of 2021 and declined as a percentage of revenue to 8.2% from 9.0% in the third quarter of 2020. The decrease in selling, general and administrative expense was attributable to a$2.8 million decrease in selling expense due to a$1.5 million decrease in variable selling expenses resulting from decreases in sales commissions produced by the lower number of homes delivered and a$1.3 million decrease in non-variable selling expenses primarily related to a decrease in model and sales office costs associated with our decreased community count, partially offset by a$0.5 million increase in general and administrative expense primarily related to an increase in compensation-related expenses due to our increased headcount and our strong financial performance. During the three months endedSeptember 30, 2021 , we experienced a 33% decrease in new contracts in our Southern region, from 1,773 in the third quarter of 2020 to 1,192 in the third quarter of 2021 primarily due to the difficult comparison from the record new contracts achieved during the same period last year as well as a result of our decreased community count compared to prior year. Homes in backlog increased 26% from 2,599 homes atSeptember 30, 2020 to 3,268 homes atSeptember 30, 2021 primarily due to improving demand in our more affordable communities compared to prior year. Average sales price in backlog also increased to$468,000 atSeptember 30, 2021 from$387,000 atSeptember 30, 2020 due to strong demand. During the three months endedSeptember 30, 2021 , we opened 12 new communities in our Southern region compared to opening seven communities during 2020's third quarter. Our monthly absorption rate in our Southern region declined to 4.3 per community in the third quarter of 2021 compared to 4.8 per community in the third quarter of 2020 due to the decline in new contracts during the quarter. Financial Services. Revenue from our mortgage and title operations decreased 28% to$20.8 million in the third quarter of 2021 from$28.9 million in the third quarter of 2020 due to a 5% decrease in the number of loan originations from 1,636 in 2020's third quarter to 1,554 in the third quarter of 2021 and lower margins on loans sold during the period compared to prior year's third quarter, which was a record third quarter and resulted in difficult comparisons for the third quarter of 2021, partially offset by an increase in the average loan amount from$314,000 in the quarter endedSeptember 30, 2020 to$349,000 in the quarter endedSeptember 30, 2021 . We experienced a$9.1 million decrease in operating income in the third quarter of 2021 compared to 2020's third quarter, which was primarily due to the decrease in revenue discussed above in addition to a$0.9 million increase in selling, general and administrative expense compared to the third quarter of 2020. This increase was primarily the result of an increase in compensation-related expenses due to our increase in employee headcount due to new mortgage locations and our strong financial performance. 32 -------------------------------------------------------------------------------- AtSeptember 30, 2021 ,M/I Financial, LLC ("M/I Financial") provided financing services in all of our markets. Approximately 85% of our homes delivered during the third quarter of 2021 were financed throughM/I Financial , the same as in the third quarter of 2020. Capture rate is influenced by financing availability and competition in the mortgage market, and can fluctuate from quarter to quarter. Corporate Selling, General and Administrative Expense. Corporate selling, general and administrative expense decreased$0.4 million from$18.0 million for the third quarter of 2020 to$17.6 million for the third quarter of 2021. This decrease primarily resulted from a decrease in compensation-related expenses. Equity in Loss (Income) from Joint Venture Arrangements. Equity in loss or income from joint venture arrangements represents our portion of pre-tax loss or earnings from our joint venture arrangements where a special purpose entity is established ("LLCs") with the other partners. The Company had less than$0.1 million of equity in loss and earned$0.3 million of equity in income from its LLCs during the three months endedSeptember 30, 2021 and 2020, respectively. Interest (Income) Expense - Net. Interest expense for the Company decreased$1.3 million from$1.2 million for the three months endedSeptember 30, 2020 to interest income of$0.1 million for the three months endedSeptember 30, 2021 . This decrease in interest expense was primarily the result of higher interest capitalization due to the high level of inventory we have under development compared to the prior year. Our weighted average borrowings decreased from$736.3 million in 2020's third quarter to$728.2 million in 2021's third quarter, and our weighted average borrowing rate decreased from 5.57% in the third quarter of 2020 to 5.41% for third quarter of 2021. Loss on Early Extinguishment of Debt. We recognized a loss on early extinguishment of debt of$9.1 million during the quarter endedSeptember 30, 2021 as a result of the write-off of unamortized debt issuance costs and a prepayment premium associated with the redemption of our 2025 Senior Notes. Income Taxes. Our overall effective tax rate was 21.7% for the three months endedSeptember 30, 2021 and 22.7% for the same period in 2020. The decrease in the effective rate from the three months endedSeptember 30, 2020 was primarily attributable to a$2.1 million increase in tax benefit from energy efficient home credits (see Note 10 to our financial statements for more information). Nine Months EndedSeptember 30, 2021 Compared to Nine Months EndedSeptember 30, 2020 Northern Region . During the nine months endedSeptember 30, 2021 , homebuilding revenue in our Northern region increased$261.1 million , from$890.2 million in the nine months endedSeptember 30, 2020 to$1.15 billion in the nine months endedSeptember 30, 2021 . This 29% increase in homebuilding revenue was the result of a 20% increase in the number of homes delivered (448 units), a 7% increase in the average sales price of homes delivered ($30,000 per home delivered) and a$1.8 million increase in land sale revenue. Operating income in our Northern region increased$68.5 million , from$91.5 million during the nine months endedSeptember 30, 2020 to$160.0 million during the nine months endedSeptember 30, 2021 . The increase in operating income was primarily the result of a$79.4 million increase in our gross margin, offset, in part, by a$10.9 million increase in selling, general, and administrative expense. With respect to our homebuilding gross margin, our housing gross margin improved$78.4 million , primarily due to the increase in the average sale price of homes delivered and the 20% increase in the number of homes delivered. Our housing gross margin percentage improved 260 basis points from 18.8% in the nine months endedSeptember 30, 2020 to 21.4% for the same period in 2021, primarily due to strong demand compared to the prior year. Our land sale gross margin increased by$1.0 million in the nine months endedSeptember 30, 2021 compared to the same period in 2020. Selling, general and administrative expense increased$10.9 million , from$75.8 million for the nine months endedSeptember 30, 2020 to$86.7 million for the nine months endedSeptember 30, 2021 , but declined as a percentage of revenue to 7.5% in the first nine months of 2021 compared to 8.5% in the same period in 2020. The increase in selling, general and administrative expense was attributable, in part, to an$8.6 million increase in selling expense due to (1) an$8.1 million increase in variable selling expenses resulting from increases in sales commissions produced by the higher number of homes delivered, and (2) a$0.5 million increase in non-variable selling expenses primarily related to costs associated with our additional sales offices and models as a result of increased headcount. The increase in selling, general and administrative expense was also attributable to a$2.3 million increase in general and administrative expense, which was primarily related to an increase in compensation-related expenses due to our increased headcount and our strong financial performance during the period. During the nine months endedSeptember 30, 2021 , we experienced an increase in new contracts in our Northern region, from 2,951 in the nine months endedSeptember 30, 2020 to 2,962 in the first nine months of 2021, and a 12% increase in homes in backlog from 1,904 homes atSeptember 30, 2020 to 2,139 homes atSeptember 30, 2021 . The increases in new contracts and 33 -------------------------------------------------------------------------------- homes in backlog were due to strong demand compared to prior year. Average sales price in backlog increased to$475,000 atSeptember 30, 2021 compared to$427,000 atSeptember 30, 2020 , which was primarily due to strong demand compared to prior year. During the nine months endedSeptember 30, 2021 , we opened 32 new communities in our Northern region compared to 21 during the same period in 2020. Our monthly absorption rate in our Northern region improved to 3.9 per community in the nine months endedSeptember 30, 2021 from 3.5 per community in the same period in 2020.Southern Region . During the nine months endedSeptember 30, 2021 , homebuilding revenue in our Southern region increased$275.7 million from$1.19 billion in the nine months endedSeptember 30, 2020 to$1.46 billion in the nine months endedSeptember 30, 2021 . This 23% increase in homebuilding revenue was the result of a 12% increase in the number of homes delivered (407 units) and a 10% increase in the average sales price of homes delivered ($36,000 per home delivered), offset partially by a$2.3 million decrease in land sale revenue. Operating income in our Southern region increased$89.2 million from$129.0 million in the nine months endedSeptember 30, 2020 to$218.2 million during the nine months endedSeptember 30, 2021 . This increase in operating income was the result of a$100.7 million improvement in our gross margin offset, in part, by an$11.5 million increase in selling, general, and administrative expense. With respect to our homebuilding gross margin, our gross margin on homes delivered improved$99.4 million , due primarily to the increase in average sale price of homes delivered and the increase in the number of homes delivered noted above. Our housing gross margin percentage improved 300 basis points from 20.2% in the nine months endedSeptember 30, 2020 to 23.2% in the same period in 2021, largely due to strong demand compared to prior year. Our land sale gross margin improved$1.3 million in the nine months endedSeptember 30, 2021 compared to the same period in 2020. Selling, general and administrative expense increased$11.5 million from$109.8 million in the nine months endedSeptember 30, 2020 to$121.3 million in the nine months endedSeptember 30, 2021 but declined as a percentage of revenue to 8.3% from 9.2% for the nine months endedSeptember 30, 2020 . The increase in selling, general and administrative expense was attributable to a$6.7 million increase in selling expense due to a$8.4 million increase in variable selling expenses resulting from increases in sales commissions produced by the higher number of homes delivered, offset partially by a$1.7 million decrease in non-variable selling expenses primarily related to the timing of sales office and model openings and a reduction in marketing costs. The increase in selling, general and administrative expense was also attributable to a$4.8 million increase in general and administrative expense, which was primarily related to a$1.3 million increase in compensation-related expenses due to our increased headcount and our strong financial performance and a$3.5 million increase in land-related expenses. During the nine months endedSeptember 30, 2021 , we experienced a 1% increase in new contracts in our Southern region, from 4,348 in the nine months endedSeptember 30, 2020 to 4,378 in the first nine months of 2021, and a 26% increase in backlog from 2,599 homes atSeptember 30, 2020 to 3,268 homes atSeptember 30, 2021 . The increases in new contracts and backlog were primarily due to strong demand compared to prior year. Average sales price in backlog also increased from$387,000 atSeptember 30, 2020 to$468,000 atSeptember 30, 2021 due to strong demand. During the nine months endedSeptember 30, 2021 , we opened 31 communities in our Southern region, compared to 30 during the nine months endedSeptember 30, 2020 . Our monthly absorption rate in our Southern region improved to 4.9 per community in the nine months endedSeptember 30, 2021 from 3.9 per community in the nine months endedSeptember 30, 2020 . Financial Services. Revenue from our mortgage and title operations increased$17.6 million (29%) from$61.5 million in the nine months endedSeptember 30, 2020 to$79.1 million in the nine months endedSeptember 30, 2021 due to a 17% increase in the number of loan originations from 4,142 in the nine months endedSeptember 30, 2020 to 4,833 in the nine months endedSeptember 30, 2021 and an increase in the average loan amount from$311,000 in the nine months endedSeptember 30, 2020 to$337,000 in the nine months endedSeptember 30, 2021 . We also experienced higher margins on loans sold during the period compared to 2020's first nine months. We experienced a$12.7 million increase in operating income in the nine months endedSeptember 30, 2021 compared to the same period in 2020, which was primarily due to the increase in revenue discussed above, offset partially by a$4.9 million increase in selling, general and administrative expense compared to the nine months endedSeptember 30, 2020 . The increase in selling, general and administrative expense was primarily attributable to a$3.2 million increase in compensation-related expenses due to an increase in employee headcount and an increase in incentive compensation due to improved results, a$0.4 million increase in professional fees, and a$1.3 million increase in other miscellaneous expenses. AtSeptember 30, 2021 ,M/I Financial provided financing services in all of our markets. Approximately 84% of our homes delivered during the nine months endedSeptember 30, 2021 were financed throughM/I Financial , the same as in the nine months endedSeptember 30, 2020 . Capture rate is influenced by financing availability and can fluctuate from quarter to quarter. 34 -------------------------------------------------------------------------------- Corporate Selling, General and Administrative Expense. Corporate selling, general and administrative expense increased$8.5 million from$41.9 million for the nine months endedSeptember 30, 2020 to$50.4 million for the nine months endedSeptember 30, 2021 . The increase was primarily due to a$6.3 million increase in compensation-related expenses due to our increased headcount and our strong financial results during the period, a$1.1 million increase in computer costs, a$0.6 million increase in advertising costs and a$0.5 million increase in other miscellanous expenses. Equity in Income from Joint Venture Arrangements. The Company earned$0.1 million and$0.3 million of equity in income from its LLCs during the nine months endedSeptember 30, 2021 and 2020, respectively. Interest Expense - Net. Interest expense for the Company decreased$6.9 million from$8.5 million in the nine months endedSeptember 30, 2020 to$1.6 million in the nine months endedSeptember 30, 2021 . This decrease was primarily the result of a decrease in average borrowings under our Credit Facility (as defined below) during the first nine months of 2021 compared to prior year in addition to higher interest capitalization due to the high level of inventory we have under development compared to the prior year. Our weighted average borrowings decreased from$783.3 million in the nine months endedSeptember 30, 2020 to$712.9 million in the nine months endedSeptember 30, 2021 , but our weighted average borrowing rate increased from 5.51% in 2020's first nine months to 5.63% in 2021's first nine months as a result of a change in the mix of borrowings in the current year compared to prior year. Loss on Early Extinguishment of Debt. We recognized a loss on early extinguishment of debt of$9.1 million during the nine months endedSeptember 30, 2021 as a result of the write-off of unamortized debt issuance costs and a prepayment premium associated with the redemption of our 2025 Senior Notes. Income Taxes. Our overall effective tax rate was 22.9% for the nine months endedSeptember 30, 2021 and 23.2% for the nine months endedSeptember 30, 2020 . LIQUIDITY AND CAPITAL RESOURCES Overview of Capital Resources and Liquidity. AtSeptember 30, 2021 , we had$221.2 million of cash, cash equivalents and restricted cash, with$220.9 million of this amount comprised of unrestricted cash and cash equivalents, which represents a$39.8 million decrease in unrestricted cash and cash equivalents fromDecember 31, 2020 . Our principal uses of cash for the nine months endedSeptember 30, 2021 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 redemption of our 2025 Senior Notes and the repayment of amounts outstanding under our credit facilities, and the repurchase of$15.5 million of our outstanding common shares under our 2021 Share Repurchase Program (as defined below) during the third quarter of 2021 . In order to fund these uses of cash, we used proceeds from home deliveries, the sale of mortgage loans and the sale of mortgage servicing rights, as well as excess cash balances, proceeds from the issuance of our 2030 Senior Notes (as described below), borrowings under our credit facilities, and other sources of liquidity. The Company is a party to three primary credit agreements: (1) a$550 million unsecured revolving credit facility, datedJuly 18, 2013 , as amended most recently onJune 10, 2021 (the "Credit Facility"), withM/I Homes, Inc. as borrower and guaranteed by the Company's wholly owned homebuilding subsidiaries; (2) a$175 million secured mortgage warehousing agreement, datedJune 24, 2016 , as amended most recently onMay 28, 2021 , withM/I Financial as borrower (the "MIF Mortgage Warehousing Agreement"); and (3) a$90 million mortgage repurchase agreement, datedOctober 30, 2017 , as amended most recently onOctober 25, 2021 , withM/I Financial as borrower (the "MIF Mortgage Repurchase Facility"). InAugust 2021 , we issued$300.0 million aggregate principal amount of our 2030 Senior Notes at par, for net proceeds of approximately$296.0 million . We used$257.9 million of the net proceeds to redeem all$250.0 million aggregate principal amount of our outstanding 2025 Senior Notes at a redemption price of 102.813% of the principal amount, plus accrued and unpaid interest thereon. As ofSeptember 30, 2021 , there were no borrowings outstanding and$94.4 million of letters of credit outstanding under our$550 million Credit Facility, leaving$455.6 million available. We expect to continue managing our balance sheet and liquidity carefully 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 capital requirements from cash receipts, excess cash balances and availability under our Credit Facility. During the nine months endedSeptember 30, 2021 , we delivered 6,322 homes, started 7,393 homes, and spent$473.8 million on land purchases and$281.2 million on land development. We are selectively acquiring and developing lots in our markets to 35 -------------------------------------------------------------------------------- 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 ofSeptember 30, 2021 , we had a total of 20,331 lots under contract, with an aggregate purchase price of approximately$866.7 million , to be acquired during the remainder of 2021 through 2028. Operating Cash Flow Activities. During the nine-month period endedSeptember 30, 2021 , we used$34.3 million of cash from operating activities, compared to generating$197.2 million of cash in operating activities during the nine months endedSeptember 30, 2020 . The cash used from operating activities in the first nine months of 2021 was primarily a result of a$412.2 million increase in inventory and a decrease in accrued compensation and other liabilities of$9.6 million offset, in part, by net income of$283.5 million ,$16.5 million of proceeds from the sale of mortgage loans net of mortgage loan originations, and an increase in accounts payable and customer deposits totaling$84.3 million . The$197.2 million of cash generated in operating activities in 2020's first nine months was primarily a result of net income of$159.8 million ,$14.3 million of proceeds from the sale of mortgage loans net of mortgage loan originations, and an increase in accounts payable, other liabilities and customer deposits totaling$92.9 million , offset, in part, by a$62.5 million increase in inventory, and an increase in other assets of$18.5 million . Investing Cash Flow Activities. During the nine months endedSeptember 30, 2021 , we used$31.9 million of cash from investing activities, compared to using$31.3 million of cash in investing activities during the nine months endedSeptember 30, 2020 . The cash used was primarily a result of a$34.7 million increase in our investment in joint venture arrangements, partially offset by$4.3 million of proceeds from the sale of a portion of our mortgage servicing rights in the nine months endedSeptember 30, 2021 . Our cash used during the first nine months of 2020 was primarily due to an increase in our investment in joint venture arrangements as well as an increase in purchases of property and equipment during the period. Financing Cash Flow Activities. During the nine months endedSeptember 30, 2021 , we generated$26.6 million of cash from financing activities, compared to generating$30.5 million of cash during the nine months endedSeptember 30, 2020 . The cash generated from financing activities in 2021 was primarily due to the issuance of$300.0 million of our 2030 Senior Notes, net of debt issuance costs, for$296.0 million , offset partially by the redemption of all$250.0 million of our then outstanding 2025 Senior Notes, and the repurchase of$15.5 million of our outstanding common shares during the nine months endedSeptember 30, 2021 . The cash generated from financing activities in 2020 was primarily due to the issuance of$400.0 million aggregate principal amount of our 4.95% Senior Notes due 2028 (the "2028 Senior Notes"), net of debt issuance costs, for$393.8 million , offset partially by the redemption of all$300.0 million of our then outstanding 6.75% Senior Notes due 2021, and repayments of$66.0 million (net of proceeds from borrowings) under our Credit Facility during the first nine months of 2020. OnJuly 28, 2021 , the Company announced that its Board of Directors authorized a share repurchase program (the "2021 Repurchase Program") pursuant to which the Company may purchase up to$100 million of its outstanding common shares. During the third quarter of 2021, the Company repurchased 0.2 million outstanding common shares with an aggregate purchase price of$15.5 million which was funded with cash on hand. As ofSeptember 30, 2021 , the Company is authorized to repurchase an additional$84.5 million of outstanding common shares under the 2021 Share Repurchase Program (see Note 12 to our financial statements for more information). Based on current market conditions, expected capital needs and availability, and the current market price of the Company's common shares, we expect to continue repurchasing shares during the fourth quarter of 2021. The timing and amount of any purchases under the 2021 Share Repurchase Program will be determined by the Company's management at its discretion 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. The 2021 Repurchase Program replaced and superseded the share repurchase program authorized by the Board of Directors in 2018 which authorized the repurchase of$50 million of the Company's common shares (the "2018 Share Repurchase Program"). AtSeptember 30, 2021 andDecember 31, 2020 , our ratio of homebuilding debt to capital was 31% and 34%, 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, our 2025 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 36 -------------------------------------------------------------------------------- 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 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 ofSeptember 30, 2021 : Expiration Outstanding
Available
(In thousands) Date Balance Amount
Notes payable - homebuilding (a) (a) $ -
Notes payable - financial services (b) (b)
(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$1.13 billion of availability for additional senior debt atSeptember 30, 2021 . As a result, the full$550 million commitment amount of the facility was available, less any borrowings and letters of credit outstanding. There were no borrowings outstanding and$94.4 million of letters of credit outstanding atSeptember 30, 2021 , leaving$455.6 million available. The Credit Facility has an expiration date ofJuly 18, 2025 . (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 ofM/I Financial's warehousing agreements, which was$300 million as ofSeptember 30, 2021 . The MIF Mortgage Warehousing Agreement has an expiration date ofMay 27, 2022 . Subsequent to the quarter endedSeptember 30, 2021 ,M/I Financial entered into an amendment to the MIF Mortgage Repurchase Facility which extended its term for an additional year toOctober 24, 2022 . Notes Payable - Homebuilding. Homebuilding Credit Facility. The Credit Facility provides for an aggregate commitment amount of$550 million and also includes an accordion feature pursuant to which the maximum borrowing availability may be increased to an aggregate of$700 million , subject to obtaining additional commitments from lenders. The Credit Facility matures onJuly 18, 2025 . Interest on amounts borrowed under the Credit Facility is payable at a rate which is adjusted daily and is equal to the sum of the one-month LIBOR (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). The Credit Facility includes a provision for the replacement of LIBOR under certain circumstances where one-month LIBOR is no longer available. 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$150 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 TangibleNet Worth of$1.03 billion (subject to increase over time based on earnings and proceeds from equity offerings), (2) a leverage ratio not in excess of 60%, and (3) either a minimum Interest Coverage Ratio of 1.5 to 1.0 or a minimum amount of available liquidity. In addition, the Credit Facility contains covenants that limit the Company's number of unsold housing units and model homes, as well as the amount of Investments inUnrestricted Subsidiaries and Joint Ventures (each as defined in the Credit Facility). The Company's obligations under the Credit Facility are guaranteed by all of the Company's subsidiaries, with the exception of subsidiaries that are primarily engaged in the business of mortgage financing, title insurance or similar financial businesses relating to the homebuilding and home sales business, certain subsidiaries that are not 100%-owned by the Company or another subsidiary, and other subsidiaries designated by the Company as Unrestricted Subsidiaries (as defined in the Credit Facility), subject to limitations on the aggregate amount invested in such Unrestricted Subsidiaries. The guarantors for the Credit Facility are the same subsidiaries that guarantee our 2030 Senior Notes and our 2028 Senior Notes. 37 -------------------------------------------------------------------------------- As ofSeptember 30, 2021 , the Company was in compliance with all covenants of the Credit Facility, including financial covenants. The following table summarizes the most significant restrictive covenant thresholds under the Credit Facility and our compliance with such covenants as ofSeptember 30, 2021 : Covenant Financial Covenant Requirement Actual (Dollars in millions) Consolidated Tangible Net Worth ?$ 1,034.8 $ 1,468.8 Leverage Ratio ? 0.60 0.27 Interest Coverage Ratio ? 1.5 to 1.0 16.0 to 1.0
Investments in
? 3,012 649
Notes Payable - Financial Services.
MIF Mortgage Warehousing Agreement. The MIF Mortgage Warehousing Agreement is used to finance eligible residential mortgage loans originated byM/I Financial . The MIF Mortgage Warehousing Agreement provides for a maximum borrowing availability of$175 million , which increased to$210 million fromSeptember 25, 2021 toOctober 15, 2021 and increases to$235 million fromNovember 15, 2021 toFebruary 4, 2022 , which are periods of expected increases in the volume of mortgage originations. The MIF Mortgage Warehousing Agreement expires onMay 27, 2022 . Interest on amounts borrowed under the MIF Mortgage Warehousing Agreement is payable at a per annum rate equal to the one-month LIBOR rate (subject to a floor of 0.5%) plus a spread of 190 basis points. The MIF Mortgage Warehousing Agreement includes a provision for the replacement of LIBOR under certain circumstances where one-month LIBOR is no longer available. The MIF Mortgage Warehousing Agreement is secured by certain mortgage loans originated byM/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 ofSeptember 30, 2021 , there was$141.5 million outstanding under the MIF Mortgage Warehousing Agreement andM/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 forthM/I Financial's compliance with such covenants as ofSeptember 30, 2021 : Financial Covenant Covenant Requirement Actual (Dollars in millions) Leverage Ratio ? 10.0 to 1.0 7.8 to 1.0 Liquidity ? $ 7.00$ 23.8 Adjusted Net Income > $ 0.0$ 39.6 Tangible Net Worth ? $ 15.0$ 30.3 MIF Mortgage Repurchase Facility. The MIF Mortgage Repurchase Facility is used to finance eligible residential mortgage loans originated byM/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 was scheduled to expire onOctober 25, 2021 .M/I Financial pays interest on each advance under the MIF Mortgage Repurchase Facility at a per annum rate equal to the one-month LIBOR rate (subject to a floor) plus a spread of 175 or 200 basis points depending on the loan type. The MIF Mortgage Repurchase Facility includes a provision for the replacement of LIBOR under certain circumstances where one-month LIBOR is no longer available. Subsequent to the quarter endedSeptember 30, 2021 ,M/I Financial entered into an amendment to the MIF Mortgage Repurchase Facility with an effective date ofOctober 25, 2021 . The amendment, among other things, extends the term of the MIF Mortgage Repurchase Facility for an additional year toOctober 24, 2022 , reduces the floor on one-month LIBOR from 1.0% to 0.75% (or 0.625% based on the type of loan), increases the required minimum level of Minimum TangibleNet Worth from$12.5 million to$15.0 million , increases the required minimum level of liquidity from$6.25 million to$7.0 million and updated the provision for LIBOR replacement. 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 ofSeptember 30, 2021 , there was 38 --------------------------------------------------------------------------------
Senior Notes.
3.95% Senior Notes. OnAugust 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 ofSeptember 30, 2021 , the Company was in compliance with all terms, conditions, and covenants under the indenture. We used a portion of the net proceeds from the issuance of the 2030 Senior Notes to redeem all of our outstanding 2025 Senior Notes at a redemption price of 102.813% of the principal amount, plus accrued and unpaid interest thereon, onAugust 24, 2021 . In connection with the early redemption of our 2025 Senior Notes, we incurred a$9.1 million loss on early extinguishment of debt, consisting of a prepayment premium of$7.1 million and the write-off of unamortized debt issuance costs of$2.0 million . See Note 8 to our Consolidated Financial Statements for more information regarding the 2030 Senior Notes. 4.95% Senior Notes. OnJanuary 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 ofSeptember 30, 2021 , 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 ofSeptember 30, 2021 ,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 ofM/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 byM/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 ofM/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 byM/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 thanM/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 39 -------------------------------------------------------------------------------- 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
Summarized Balance Sheet Data
As of September 30, As of December 31,
(In thousands) 2021 2020
Assets:
Cash $ 194,339 $ 223,284
Investment in joint venture arrangements $ 42,314 $ 33,764
Amounts due from Non-Guarantor Subsidiaries $ 205 $ 2,073
Total assets $
2,768,069
Liabilities and Shareholders' Equity
Total liabilities$ 1,269,883 $ 1,133,884 Shareholders' equity $
1,498,186
Summarized Statement of Income Data
Nine Months Ended
(In thousands) September 30, 2021
Revenues $ 2,615,057
Land and housing costs $ 2,028,822
Selling, general and administrative expense $ 257,280
Income before income taxes $ 321,106
Net income $ 246,800
Weighted Average Borrowings. For the three months ended September 30, 2021 and
2020, our weighted average borrowings outstanding were $728.2 million and
$736.3 million , respectively, with a weighted average interest rate of 5.41% and
5.57%, respectively. The decrease in our weighted average borrowings related to
decreased borrowings under our two M/I Financial Credit Facilities during the
third quarter of 2021 compared to the same period in 2020.
At both September 30, 2021 and December 31, 2020 , we had no borrowings
outstanding under the Credit Facility. Based on our currently anticipated
spending on home construction, overhead expenses, land acquisition and
development during the remainder of 2021, offset by our cash balances and
expected cash receipts from home deliveries, the likelihood of borrowing under
the Credit Facility during the remainder of 2021 is low and, to the extent that
we do borrow under the Credit Facility during the remainder of the year, we do
not expect the peak amount outstanding to exceed $50 million . The actual amount
borrowed during the remainder of 2021 and the related timing will be subject to
numerous factors, including 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 additional 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 $94.4 million of letters of credit issued and outstanding under the
Credit Facility at September 30, 2021 . During the nine months ended September
30, 2021 , the average daily amount of letters of credit outstanding under the
Credit Facility was $74.7 million and the maximum amount of letters of credit
outstanding under the Credit Facility was $94.5 million .
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At September 30, 2021 , M/I Financial had $141.5 million outstanding under the
MIF Mortgage Warehousing Agreement. During the nine months ended September 30,
2021 , the average daily amount outstanding under the MIF Mortgage Warehousing
Agreement was $8.5 million and the maximum amount outstanding was
$168.1 million , which occurred during January 2021 , while the temporary increase
provision was in effect and the maximum borrowing availability was
$185.0 million .
At September 30, 2021 , M/I Financial had $69.8 million outstanding under the MIF
Mortgage Repurchase Facility. During the nine months ended September 30, 2021 ,
the average daily amount outstanding under the MIF Mortgage Repurchase Facility
was $43.6 million and the maximum amount outstanding was $78.6 million , which
occurred during April 2021 .
Universal Shelf Registration. In June 2019 , the Company filed a $400 million
universal shelf registration statement with the SEC , which registration
statement became effective upon filing and will expire in June 2022 . 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.
CONTRACTUAL OBLIGATIONS
Our contractual obligations as of September 30, 2021 have not changed materially
from those reported in the Contractual Obligations section of Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in our 2020 Form 10-K, except that:
•In May 2021 , we entered into the Fifth Amendment to the MIF Warehousing
Agreement;
•In June 2021 , we entered into the Fourth Amendment to the Credit Facility;
•In August 2021 , we issued $300 million in aggregate principal amount of 2030
Senior Notes, and used a portion of the proceeds to redeem all of our then
outstanding 2025 Senior Notes; and
•In October 2021 , we entered into the Fourth Amendment to the MIF Mortgage
Repurchase Facility.
Included in the table below is a summary of future cash requirements under the
Company's contractual obligations with regard to our long-term debt and interest
commitments as of September 30, 2021 :
Payments due by period
October 1, 2021 January 1, 2024
through December through December 31,
(In thousands) Total 31, 2023 2025 Thereafter
Notes payable bank - homebuilding $ - $ -
operations (a) $ - $ -
Notes payable bank - financial - -
services (b) 211,351 211,351
Senior notes (including interest) 929,162 63,037 63,300 802,825
Total $ 1,140,513 $ 274,388 $ 63,300 $ 802,825
(a)At September 30, 2021 , there were no borrowings outstanding under the Credit
Facility.
(b)Borrowings under the MIF Mortgage Warehousing Agreement are at the one-month
LIBOR rate (subject to a floor of 0.5%) plus a spread of 190 basis
points. Borrowings under the MIF Mortgage Repurchase Facility are at the
one-month LIBOR rate (subject to a floor) plus a spread of 175 or 200 basis
points, depending on the loan type. Total borrowings outstanding under both
agreements at September 30, 2021 had a weighted average interest rate of
2.5%. Interest payments by period will be based upon the outstanding borrowings
and the applicable interest rate(s) in effect.
See Note 8 of our Unaudited Condensed Consolidated Financial Statements and
the "Liquidity and Capital Resources" section above for further information.
OFF-BALANCE SHEET ARRANGEMENTS
Notes 3 , 5 and 6 to our Condensed Consolidated Financial Statements
discuss our off-balance sheet arrangements with respect to land acquisition
contracts and option agreements, and land development joint ventures, including
the nature and amounts of financial obligations relating to these items. In
addition, these Notes discuss the nature and amounts of certain types of
commitments that arise in the ordinary course of our land development and
homebuilding operations, including commitments of land development joint
ventures for which we might be obligated.
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. Our use of these arrangements is for
the purpose of securing the most desirable lots on which to build
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homes for our homebuyers in a manner that we believe reduces the overall risk to
the Company. Additionally, in the ordinary course of its business, M/I Financial
issues guarantees and indemnities relating to the sale of loans to third
parties.
Land Option Agreements. In the ordinary course of business, the Company enters
into land option or purchase agreements for which we generally pay
non-refundable deposits. Pursuant to these land option agreements, the Company
provides a deposit to the seller as consideration for the right to purchase land
at different times in the future, usually at predetermined prices. In
accordance with Accounting Standards Codification 810-10 Consolidation ("ASC
810"), we analyze our land option or purchase agreements to determine whether
the corresponding land sellers are variable interest entities ("VIE") and, if
so, whether we are the primary beneficiary. Although we do not have legal title
to the optioned land, ASC 810 requires a company to consolidate a VIE if the
company is determined to be the primary beneficiary. In cases where we are the
primary beneficiary, even though we do not have title to such land, we are
required to consolidate these purchase/option agreements and reflect such assets
and liabilities as Consolidated Inventory not Owned in our Unaudited Condensed
Consolidated Balance Sheets. At both September 30, 2021 and December 31, 2020 ,
we have concluded that we were not the primary beneficiary of any VIEs from
which we are purchasing under land option or purchase agreements.
In addition, we evaluate our land option or purchase agreements to determine for
each contract if (1) a portion or all of the purchase price is a specific
performance requirement, or (2) the amount of deposits and prepaid acquisition
and development costs have exceeded certain thresholds relative to the remaining
purchase price of the lots. If either is the case, then the remaining purchase
price of the lots (or the specific performance amount, if applicable) is
recorded as an asset and liability in Consolidated Inventory Not Owned on our
Consolidated Balance Sheets.
At September 30, 2021 , "Consolidated Inventory Not Owned" was $4.4 million . At
September 30, 2021 , the corresponding liability of $4.4 million has been
classified as Obligation for Consolidated Inventory Not Owned on our Unaudited
Condensed Consolidated Balance Sheets.
Other than the Consolidated Inventory Not Owned balance, the Company currently
believes that its maximum exposure as of September 30, 2021 related to our land
option agreements is equal to the amount of the Company's outstanding deposits
and prepaid acquisition costs, which totaled $71.8 million , including cash
deposits of $48.6 million , prepaid acquisition costs of $9.2 million , letters of
credit of $12.6 million and $1.4 million of other non-cash deposits.
Letters of Credit and Completion Bonds. The Company provides standby letters of
credit and completion bonds for development work in progress, deposits on land
and lot purchase agreements and miscellaneous deposits. As of September 30,
2021 , the Company had outstanding $363.6 million of completion bonds and standby
letters of credit, some of which were issued to various local governmental
entities, that expire at various times through November 2027 . Included in this
total are: (1) $263.6 million of performance and maintenance bonds and $81.4
million of performance letters of credit that serve as completion bonds for land
development work in progress; (2) $13.0 million of financial letters of credit;
and (3) $5.6 million of financial bonds. The development agreements under which
we are required to provide completion bonds or letters of credit are generally
not subject to a required completion date and only require that the improvements
are in place in phases as houses are built and sold. In locations where
development has progressed, the amount of development work remaining to be
completed is typically less than the remaining amount of bonds or letters of
credit due to timing delays in obtaining release of the bonds or letters of
credit.
Guarantees and Indemnities. In the ordinary course of business, M/I Financial
enters into agreements that guarantee purchasers of its mortgage loans that M/I
Financial will repurchase a loan if certain conditions occur. The risks
associated with these guarantees are offset by the value of the underlying
assets, and the Company accrues its best estimate of the probable loss on these
loans. Additionally, the Company has provided certain other guarantees and
indemnities in connection with the acquisition and development of land by our
homebuilding operations. See Note 5 to our Condensed Consolidated Financial
Statements for additional details relating to our guarantees and indemnities.
INTEREST RATES AND INFLATION
Our business is significantly affected by general economic conditions withinthe United States and, particularly, by the impact of interest rates and inflation. Inflation can have a long-term impact on us because increasing costs of land, materials and labor can result in a need to increase the sales prices of homes. In addition, inflation is often accompanied by higher interest rates, which can have a negative impact on housing demand and the costs of financing land development activities and housing construction. Higher interest rates also may decrease our potential market by making it more difficult for homebuyers to qualify for mortgages or to obtain mortgages at interest rates that are acceptable to them. The impact of increased rates can be offset, in part, by offering variable rate loans with lower interest rates. In conjunction with our mortgage financing services, hedging methods are used to reduce our exposure to interest rate fluctuations between the commitment date of the loan and the 42 -------------------------------------------------------------------------------- time the loan closes. Rising interest rates, as well as increased materials and labor costs, may reduce gross margins. An increase in material and labor costs is particularly a problem during a period of declining home prices. Conversely, deflation can impact the value of real estate and make it difficult for us to recover our land costs. Therefore, either inflation or deflation could adversely impact our future results of operations. 43
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