Fitch Downgrades M/I Homes' IDR & Senior Unsecured to 'BB-'; Outlook Negative

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded M/I Homes, Inc.'s (NYSE:MHO) ratings as follows:

--Issuer Default Rating (IDR) to 'BB-' from 'BB';

--Senior unsecured to 'BB-' from 'BB';

--Unsecured bank credit facility to 'BB-' from 'BB';

--Series A non-cumulative perpetual preferred stock to 'B' from 'B+'.

The Rating Outlook remains Negative.

The downgrade reflects the current difficult U.S. housing environment, negative trends in M/I Homes' operating margins and meaningful deterioration in credit metrics, especially interest coverage and debt/EBITDA ratios.

The Negative Outlook for M/I Homes reflects a more challenging outlook for homebuilders during the balance of calendar 2007 (largely due to disruptions and tightening of standards in the mortgage market) and probable future weakening in the housing market in 2008. Fitch has also taken into account the current and expected near-term deterioration in credit metrics which are similar to the trends being experienced by others in the industry and persistent high cancellation rates which add to speculative inventory totals.

Future ratings and Outlooks will be influenced by broad housing market trends as well as company specific activity, such as 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 free cash flow trends and uses.

The housing sector is in the midst of a meaningful, multi-year downturn. M/I Homes has been increasing its sales and marketing efforts, focusing on managing speculative inventory (enlarged by unusually high cancellation rates), reducing its lot supply and its land positions, renegotiating option contracts and, where possible, reducing overhead and direct construction costs. During this current downturn M/I Homes, like most builders, has leveraged the financial flexibility of land options, walking away from overpriced lots (forfeiting its deposits). These builders also have reported meaningful charges associated with write downs of land values.

Historically, M/I Homes' revenues have been internally generated as it has rarely utilized corporate acquisitions. During the past few years the company stepped up its growth as it channeled more capital into its non-Midwestern operations, especially Florida and greater Washington, D.C. Land purchases were $269 million in 2004 and $320 million in 2005. M/I Homes sharply cut back on land purchases to $165 million in 2006 and is expected to spend significantly less in 2007.

M/I Homes' inventory turns are moderately below average as compared to its public peers and had slimmed in recent years as the company has made a conscious effort to scale up the share of its communities which it develops (to the advantage of margins). At present, the company develops about 80% of its communities from which it sells product. In the future, M/I Homes is likely to be less focused on land development. M/I Homes maintains an approximate 5.2 year supply of total lots controlled, based on trailing 12 months deliveries, and 4.7 years of owned land. Total lots controlled were 19,641 at June 30, 2007, 89.7% of which are owned, and the balance is controlled through options.

Up until 2005, acquisitions had not played a part in the company's operating strategy, as management has preferred to focus on internal growth. However, in July 2005 the company did acquire Shamrock Homes, a small privately held homebuilder in Lake County, FL that is adjacent to the greater Orlando market where M/I Homes has been building since 1985. In May 2007, the company announced its greenfield entry into the Chicago market. Any future acquisitions are likely to be relatively small, either bolt-on to existing operations or entry into new markets.

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