CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings for M/I Homes, Inc. (NYSE: MHO), including the company's Issuer Default Rating (IDR) at 'B'. The Rating Outlook is Stable. A complete list of ratings follows at the end of this release.
Fitch has also assigned a 'CCC+/RR6' rating to MHO's proposed offering of $50 million convertible senior subordinated notes due 2018. These notes will be subordinated in right of payment to the company's existing and future senior debt, including the company's revolving credit facility and senior unsecured notes. The company also announced the proposed concurrent public offering of 2.14 million shares of its common stock. MHO intends to use up to $50 million of the net proceeds from the offerings to redeem a portion of its outstanding 9.75% Series A Preferred Shares. The balance of the net proceeds will be used for general corporate purposes, which may include acquisitions of land, land development, home construction, repayment of debt or the payment of dividends on, or further redemptions of, its 9.75% Series A Preferred Shares.
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, healthy liquidity position and the improving industry outlook for 2013 and 2014.
LIQUIDITY AND LAND STRATEGY
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. 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%, although the increase was due to lots under option as its owned lot position actually declined 6% year-over-year. During 2012, total lots controlled expanded 37% year-over-year as lots optioned more than doubled while its owned lot position grew 3.6%. MHO also expanded its Houston, Texas operations by acquiring the assets of a privately-held homebuilder.
MHO maintains an approximately 5.1-year supply of total lots controlled, based on trailing 12 months deliveries, and 2.7 years of owned land. Total lots controlled were 14,203 lots at Dec. 31, 2012, 52.2% 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. However, in 2012 approximately 60% of its land purchases were raw and partially developed land deals and the remaining 40% were finished lots.
The company increased its land and development expenditures by 62% during 2012, spending $190 million ($134 million for land purchases and $56 million for development activities) during the year compared with $117 million spent in 2011. Based on the current environment, MHO projects $250 million to $300 million of land and development spending for all of 2013. As a result, Fitch expects MHO to be cash flow negative by about $75 million to $125 million during 2013. Fitch is comfortable with this strategy given management's demonstrated ability to manage its inventory and adjust land and development spending to maintain a healthy liquidity position, as it did during 2011 and 2012.
MHO ended 2012 with $145.7 million of unrestricted cash and $47.3 million of availability under its $140 million secured revolving credit facility that matures in December 2014. The availability under the revolver is based on $163.2 million in aggregate book value of inventory pledged to secure borrowings under the revolver. MHO can increase the borrowing availability by increasing the amount of inventory that is pledged to support the facility. Fitch expects the company's unrestricted cash balance will fall below $100 million by the end of 2013 as the company increases land and development spending.
The company reported a 21% increase in home deliveries during 2012 and homebuilding revenues grew 33.8% compared to 2011. MHO also reported improvement in net orders in each of the last seven quarters, contributing to a 42.8% increase in homes in backlog at Dec. 31, 2012 compared with year earlier levels. The significant increase in backlog, combined with the company's strategy to grow subdivision count by 25% this year, should result in meaningfully higher deliveries in 2013 compared with 2012.
MHO's credit metrics improved relative to 2011 levels but remain weak for the rating category. Homebuilding debt to EBITDA improved from 13.8x at year-end 2011 to 7x at year-end 2012. EBITDA to interest increased to 1.6x during 2012 from 0.7x during 2011. Fitch currently expects leverage to remain above 6.5x and interest coverage to be close to 2x by the conclusion of fiscal 2013.
IMPROVING HOUSING MARKET
Fitch's housing forecasts for 2013 assume a modest rise off a very low bottom. In a slowly growing economy with somewhat diminished distressed home sales competition, less competitive rental cost alternatives, and new and existing home inventories at historically low levels, 2013 total housing starts should improve about 18.6% to 925,000, while new home sales increase approximately 22% and existing home sales grow 7.7%.
However, as Fitch has noted in the past, recovery will likely occur in fits and starts.
Challenges (although somewhat muted) remain, including continued relatively high levels of delinquencies, potential of short-term acceleration in foreclosures, and consequent meaningful distressed sales, restrictive credit qualification standards and limited availability of developed lots in certain markets.
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;
--Free cash flow trends and uses; and
--MHO's cash position.
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 steady improvement in credit metrics (such as homebuilding debt to EBITDA levels consistently below 6x) while maintaining a healthy liquidity position (above $100 million with a combination of cash and revolver availability).
Conversely, negative rating actions could occur if the recovery in housing dissipates; MHO's 2013 revenues drop by the mid-teens while the pretax loss approaches levels of 2010 and 2011; 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 affirms the following ratings for MHO with a Stable Outlook:
--Long-term IDR at 'B';
--Senior unsecured notes at 'B+/RR3';
--Convertible Senior Subordinated notes at 'CCC+/RR6';
--Series A non-cumulative perpetual preferred stock at '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 proposed convertible senior subordinated notes and preferred stock indicates poor recovery prospects in a default scenario. Fitch applied a liquidation value analysis for these recovery ratings.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers' (Aug. 14, 2012).
Applicable Criteria and Related Research
Corporate Rating Methodology
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers