Fitch Affirms M/I Homes' IDR at 'B'; Outlook to Stable

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

--Issuer Default Rating (IDR) at 'B';

--Senior Unsecured Notes at 'B+/RR3';

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

The Rating Outlook has been revised to Stable from Negative.

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 preferred stock indicates poor recovery prospects in a default scenario. Fitch applied a liquidation value analysis for these RRs.

MHO's ratings reflect the company's execution of its business model in the current housing environment, improved 2010 operating results, healthy liquidity position and better prospects for the housing sector this year.

The Outlook revision to Stable from Negative takes into account the diminished near-term liquidity risk associated with debt maturities MHO had last year. During the last rating review, the company had not renewed its $150 million revolving credit facility and had not addressed the refinancing of a $200 million bond maturing in April 2012. In June 2010, the company entered into a new three-year secured revolving credit facility with an aggregate commitment of $140 million. In November 2010, MHO completed the private placement of $200 million of 8.625% senior unsecured notes maturing on Nov. 15, 2018. Proceeds from the senior notes offering were used to redeem $158.6 million of MHO's 6.875% senior unsecured notes maturing in April 2012. At the end of 2010, the company had $41.4 million outstanding on its 6.875% senior notes. The company has sufficient cash and revolver availability to pay-off this upcoming debt maturity.

MHO successfully managed its balance sheet during the severe housing downturn, allowing the company to accumulate cash and pay down its debt as it pared down its inventory. Since the end of 2006, MHO repaid approximately $370 million of debt. After significantly reducing its owned lot inventory in 2009 (net of modest land acquisitions), MHO began to focus on growing its business in late 2009 and during 2010 by investing in new communities and entering new markets. In 2010, the company purchased more than double the amount of land and lots that it had purchased in 2009, opening 41 new communities and increasing its controlled lot position by 9.2%. (MHO's owned land position increased 5.8% during 2010.) At the same time, the company maintained adequate liquidity and ended the year with $123.1 million of cash (including restricted cash).

MHO maintains an approximately 4.2-year supply of total lots controlled, based on trailing 12 months deliveries, and three years of owned land. Total lots controlled were 10,170 lots at Dec. 31, 2010, 74.8% of which are owned, and the balance is controlled through options. Historically, MHO developed about 80% of its communities from which it sells product, resulting in inventory turns that were moderately below average as compared to its public peers. During the downturn, MHO had been less focused on land development.

The company reported higher year-over-year home deliveries during 2010, and homebuilding revenues grew 8.3% compared to 2009. MHO also reported a 2.7% increase in net orders during the fourth quarter of 2010 while a majority of the public homebuilders in Fitch's coverage reported lower orders for the quarter. In 2011, Fitch expects MHO's home deliveries to increase modestly compared to 2010 as new housing activity improves moderately this year. However, higher building material costs as well as weak new home prices will likely contribute to continued pressure on gross margins during the year. Additionally, Fitch expects MHO to be mildly cash flow negative during 2011 as the company continues to rebuild its land position (through land purchases and development spending). The company expects land and development spending during 2011 to be roughly comparable to 2010 levels, which totaled $153 million for the year. During 2010, MHO was $37.3 million cash flow negative, which included $29.1 million of tax refunds during the year.

There has been little upward momentum in housing so far off the cyclical bottom. As expected, housing metrics (new home sales, existing home sales, and housing starts) sharply contracted following the expiration of the national housing credit. Clearly, the credit 'stole' demand from upcoming months. Fitch anticipated that the summer and fall months of 2010 would be most affected by the 'pull forward' of the housing credit and some ratcheting up in demand (in response to even lower home prices and hopefully better employment and consumer confidence) may not be apparent until perhaps later this spring. Fitch currently projects new single-family housing starts will increase 8.5% in 2011 following a 5.8% growth in 2010. After falling 14.4% in 2010, new home sales are forecast to grow about 2% in 2011. Fitch expects existing home sales will stay flat in 2011 after a 4.8% decline in 2010.

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. Negative rating actions could occur if the anticipated recovery in housing does not materialize and the company prematurely steps up its land /development spending, leading to consistent and significant negative quarterly cash flow from operations. MHO's rating is constrained in the intermediate term due to weak credit metrics, but a Positive Outlook may be considered if the recovery in housing is significantly better than Fitch's outlook and the company shows further improvement in credit metrics and its liquidity position.

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

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 13, 2010);

--'Liquidity Considerations for Corporate Issuers' (June 12, 2007.

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646

Liquidity Considerations for Corporate Issuers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=328666

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Contacts

Fitch Ratings
Sandro Scenga, +1-212-908-0278
Media Relations, New York
sandro.scenga@fitchratings.com
or
Primary Analyst:
Robert Rulla, CPA, +1-312-606-2311
Director
Fitch, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Robert Curran, +1-212-908-0515
Managing Director
or
Committee Chairperson:
Wesley Moultrie, +1-312-368-3186
Managing Director

Contacts

Fitch Ratings
Sandro Scenga, +1-212-908-0278
Media Relations, New York
sandro.scenga@fitchratings.com
or
Primary Analyst:
Robert Rulla, CPA, +1-312-606-2311
Director
Fitch, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Robert Curran, +1-212-908-0515
Managing Director
or
Committee Chairperson:
Wesley Moultrie, +1-312-368-3186
Managing Director