Fitch Rates M/I Homes' Proposed $350MM Sr. Unsecured Notes Offering 'B+/RR3'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has assigned a 'B+/RR3' rating to M/I Homes Inc.'s MHO proposed offering of $350 million aggregate amount of senior unsecured notes in two series. One series will mature in 2019 and the other series will mature in 2022. These new issues will be equal in right of payment with all other senior unsecured debt.

The company intends to use a portion of the net proceeds to repurchase or redeem all of its existing $230 million of 8.625% senior unsecured notes due 2018 and to pay related fees and expenses. MHO intends to use the remaining proceeds of the offering for general corporate purposes.

The Rating Outlook is Stable.

A complete list of ratings follows at the end of this release.

KEY RATING DRIVERS

MHO's ratings and Outlook reflect the company's execution of its business model in the current housing environment, management's demonstrated ability to manage land and development spending, adequate liquidity position, improving credit metrics and Fitch's expectation of further moderate improvement in the housing market in 2014 and 2015.

IMPROVING CREDIT METRICS

MHO's credit metrics have improved significantly over the past few years as the housing market continues to recover. Leverage as measured by debt to EBITDA declined from 7.0x at year-end 2012 to 5.1x at the conclusion of 2013 and about 4.1x for the LTM period ending Sept. 30, 2014. Similarly, EBITDA to interest increased from 1.6x at the end of 2012 to 2.5x at year-end 2013 and 3.2x for the Sept. 30, 2014 LTM period. Fitch expects the company's leverage will settle around 5.2x at the end of 2014 as a result of higher debt levels from the notes issuance. Interest coverage is projected to remain above 3x at the end of the year.

THE INDUSTRY

Housing metrics all showed improvement in 2013. However, what began as an untypically moderate housing recovery has decelerated further since late 2013. For the first nine months of 2014, existing home sales fell 4.9%, while new home sales grew 1.7%. Single-family housing starts increased 3.8% during the January-September YTD period.

To reflect the subpar spring selling season, as well as the more guarded expectation for the next few months, Fitch tapered its macro housing forecast. Single-family starts are projected to improve 3% to 636,000 and multifamily volume grows about 17.5% to 361,000. Total 2014 starts should still approximate 1 million. New home sales are forecast to advance about 1.5% to 436,000, while existing home sales volume is expected to decline 6% to 4.785 million, largely due to fewer distressed homes for sale.

Housing activity is likely to ratchet up more sharply in 2015 with the support of a steadily growing economy throughout the year. The unemployment rate should continue to move lower (averaging 5.8% in 2015). Credit standards should steadily, moderately ease throughout next year. Demographics should be more of a positive catalyst. More of those younger adults who have been living at home should find jobs and these 25- to 35-year-olds should provide some incremental elevation to the rental and starter home markets. Total housing starts are projected to expand 14% to 1.14 million as single-family starts advance 18% and multifamily volumes gain 7%. New home sales should grow 18%, while existing home sales rise 5%.

MHO's HOMEBUILDING OPERATIONS

MHO reported strong revenues so far this year. Homebuilding revenues increased 21.7% for the first nine months of 2014 as home deliveries grew 11.2% and the average sales price advanced 9.4% compared with the same period last year. Homebuilding gross margins also improved during the 2014 YTD period, growing 170 bps to 19% compared with 17.3% during the first nine months of 2013.

On the other hand, new home orders have been weak so far this year. New home orders fell 3.5% for the first nine months of the year, although orders for the third quarter of 2014 were 2.6% higher year-over-year. MHO ended the third quarter with 1,554 homes in backlog (down 3.3% YOY) with a value of $518.1 million (up 6.1% YOY).

ADEQUATE LIQUIDITY POSITION

As of Sept. 30, 2014, the company had $17.2 million of unrestricted cash and $166 million of borrowing availability under its $200 million revolving credit facility. On Oct. 20, 2014, MHO amended its revolver, increasing the commitment from $200 million to $300 million (with an accordion up to $400 million, subject to additional commitments) and extended the maturity to Oct. 20, 2018.

The company has no major debt maturities until 2017, when $57.5 million of convertible senior subordinated notes mature.

LAND STRATEGY

After significantly reducing its lot inventory during the 2006 to 2009 periods, MHO began to focus on growing its business in late 2009 by investing in new communities and entering new markets. In 2010, the company increased its total lot position by 9.2% and expanded into the Houston, Texas market. During 2011, the company entered the San Antonio, Texas market and also grew its total lot position by 1.8%. MHO extended its geographic footprint by expanding further into Texas, entering the Austin market in 2012 and the Dallas/Fort Worth market in 2013. Total lots controlled increased 37.2% in 2012 and 39.6% in 2013. Total lots controlled as of Sept. 30, 2014 are 16.3% higher year-over-year.

MHO maintains an approximately 5.6-year supply of total lots controlled, based on trailing 12 months deliveries, and 3.0 years of owned land. Total lots controlled were 21,082 at Sept. 30, 2014. About 53.2% of the lots are owned and the balance is controlled through options.

LAND SPENDING AND CASH FLOW

MHO spent $323.6 million on land and development during 2013 ($216.8 million for land and $106.8 million for development) compared with $195.2 million expended during 2012 ($138.8 million for land and $56.4 million for development) and $117.2 million in total spending during 2011. For the first nine months of 2014, MHO spent $277 million on land purchases and land development ($184 million for land and $93 million for development). The company expects $375 million to $425 million of land and development spending for all of 2014.

During 2013, MHO reported negative cash flow from operations (CFFO) of $74 million compared with negative $47 million during 2012 and negative $34 million during 2011. For the LTM period ending Sept. 30, 2014, the company had negative CFFO of $140.2 million. Fitch expects MHO will have negative CFFO of about $100 million to $125 million in 2014 as the company continues to expand its land position.

Fitch is comfortable with this strategy given the company's healthy liquidity position and management's demonstrated ability to manage its spending.

RATING SENSITIVITIES

Future ratings and Outlooks will be influenced by broad housing-market trends as well as company specific activity, such as trends in land and development spending, general inventory levels, speculative inventory activity (including the impact of high cancellation rates on such activity), gross and net new order activity, debt levels and especially free cash flow trends and uses, and the company's cash position.

Positive rating actions may be considered in the next 6-12 months if the recent volatile industry data stabilizes (as expected) and the recovery in housing is maintained, MHO's credit metrics are sustained or improve further (particularly debt to EBITDA consistently below 5.5x and interest coverage sustaining above 2.25x), and the company preserves a healthy liquidity position (above $100 million) with a combination of unrestricted cash and revolver availability.

Conversely, negative rating actions could occur if the recovery in housing dissipates; MHO's 2015 revenues drop by the mid-teens while the EBITDA margins decline below 5%; leverage exceeds 9x; and MHO maintains an overly aggressive land and development spending program that leads to consistent and significant negative quarterly cash flow from operations and meaningfully diminished liquidity position (perhaps below $50 million).

Fitch currently rates MHO as follows:

--Long-term IDR 'B';

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

--Unsecured revolving credit facility 'B+/RR3';

--Convertible senior subordinated notes 'CCC+/RR6';

--Series A non-cumulative perpetual preferred stock 'CCC/RR6'.

The Recovery Rating (RR) of 'RR3' on MHO's senior unsecured notes indicates good recovery prospects for holders of this debt issue. MHO's exposure to claims made pursuant to performance bonds and the possibility that part of these contingent liabilities would have a claim against the company's assets were considered in determining the recovery for the unsecured debt holders. The 'RR6' on MHO's convertible senior subordinated notes and preferred stock indicates poor recovery prospects in a default scenario. Fitch applied a going concern valuation analysis for these Recovery Ratings.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=907954

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