M/I Homes (MHO) 10-Q2023 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Common shares, par value $.01 per share: 27,829,416 shares outstanding as of April 26, 2023.

M/I HOMES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

M/I HOMES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

M/I HOMES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

M/I HOMES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. Basis of Presentation

The accompanying Unaudited Condensed Consolidated Financial Statements (the “financial statements”) of M/I Homes, Inc. and its subsidiaries (the “Company”) and notes thereto have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. The financial statements include the accounts of the Company. All intercompany transactions have been eliminated. Results for the interim period are not necessarily indicative of results for a full year. In the opinion of management, the accompanying financial statements reflect all adjustments (all of which are normal and recurring in nature) necessary for a fair presentation of financial results for the interim periods presented. These financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”).

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during that period. Actual results could differ from these estimates and have a significant impact on the financial condition and results of operations and cash flows. With regard to the Company, estimates and assumptions are inherent in calculations relating to valuation of inventory and investment in unconsolidated joint ventures, property and equipment depreciation, valuation of derivative financial instruments, accounts payable on inventory, accruals for costs to complete inventory, accruals for warranty claims, accruals for self-insured general liability claims, litigation, accruals for health care and workers’ compensation, accruals for guaranteed or indemnified loans, stock-based compensation expense, income taxes, and contingencies. Items that could have a significant impact on these estimates and assumptions include the risks and uncertainties listed in “Item 1A. Risk Factors” in Part I of our 2022 Form 10-K, as the same may be updated from time to time in our subsequent filings with the SEC.

Significant Accounting Policies

There have been no significant changes to our significant accounting policies during the quarter ended March 31, 2023 as compared to those disclosed in our 2022 Form 10-K.

NOTE 2. Inventory and Capitalized Interest

Inventory

A summary of the Company’s inventory as of March 31, 2023 and December 31, 2022 is as follows:

Single-family lots, land and land development costs include raw land that the Company has purchased to develop into lots, costs incurred to develop the raw land into lots, and lots for which development has been completed, but which have not yet been used to start construction of a home.

Homes under construction include homes that are in various stages of construction. As of March 31, 2023 and December 31, 2022, we had 1,551 homes (with a carrying value of $316.2 million) and 1,827 homes (with a carrying value of $431.7 million), respectively, included in homes under construction that were not subject to a sales contract.

Model homes and furnishings include homes that are under construction or have been completed and are being used as sales models. The amount also includes the net book value of furnishings included in our model homes. Depreciation on model home furnishings is recorded using an accelerated method over the estimated useful life of the assets, which is typically three years.

We own lots in certain communities in Florida that have Community Development Districts (“CDDs”). The Company records a liability for the estimated developer obligations that are probable and estimable and user fees that are required to be paid or transferred at the time the parcel or unit is sold to an end user.  The Company reduces this liability at the time of closing and the transfer of the property.  The Company recorded a $27.1 million liability and a $29.7 million liability related to these CDD bond obligations as of March 31, 2023 and December 31, 2022, respectively, along with the related inventory infrastructure.

Land purchase deposits include both refundable and non-refundable amounts paid to third party sellers relating to the purchase of land. On an ongoing basis, the Company evaluates the land option agreements relating to the land purchase deposits. The Company expenses any deposits and accumulated pre-acquisition costs relating to such agreements in the period when the Company makes the decision not to proceed with the purchase of land under an agreement.

Capitalized Interest

In order to minimize our investment and risk of land exposure in a single location, we have periodically partnered with other land developers or homebuilders to share in the land investment and development of a property through joint ownership and development agreements, joint ventures, and other similar arrangements. As of March 31, 2023 and December 31, 2022, our investment in such joint venture arrangements totaled $49.0 million and $51.6 million, respectively, and was reported as Investment in Joint Venture Arrangements on our Unaudited Condensed Consolidated Balance Sheets. The $2.6 million decrease during the three-month period ended March 31, 2023 was driven primarily by lot distributions from our joint venture arrangements of $5.2 million, offset, in part, by our cash contributions to our joint venture arrangements during the first quarter of 2023 of $2.7 million.

The remainder of our investment in joint venture arrangements was comprised of joint venture arrangements where a special purpose entity was established to own and develop the property. For these joint venture arrangements, we generally enter into limited liability company or similar arrangements (“LLCs”) with the other partners. These entities typically engage in land development activities for the purpose of distributing or selling developed lots to the Company and its partners in the LLC. As of March 31, 2023 and December 31, 2022, the Company had $5.7 million and $5.6 million, respectively, of equity invested in

LLCs. The Company’s percentage of ownership in these LLCs as of both March 31, 2023 and December 31, 2022 ranged from 25% to 50%.

We believe that the Company’s maximum exposure related to its investment in these joint venture arrangements as of March 31, 2023 was the amount invested of $49.0 million, which is reported as Investment in Joint Venture Arrangements on our Unaudited Condensed Consolidated Balance Sheets. We expect to invest further amounts in these joint venture arrangements as development of the properties progresses.

Land Option Agreements

There are three measurement input levels for determining fair value: Level 1, Level 2, and Level 3. Fair values determined by Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.

The Company measures both mortgage loans held for sale and interest rate lock commitments (“IRLCs”) at fair value. Fair value measurement results in a better presentation of the changes in fair values of the loans and the derivative instruments used to economically hedge them.

In the normal course of business, our financial services segment enters into contractual commitments to extend credit to buyers of single-family homes with fixed expiration dates.  The commitments become effective when the borrowers “lock-in” a specified interest rate within established time frames.  Market risk arises if interest rates move adversely between the time of the “lock-in” of rates by the borrower and the sale date of the loan to an investor.  To mitigate the effect of the interest rate risk inherent in providing rate lock commitments to borrowers, the Company enters into optional or mandatory delivery forward

sale contracts to sell whole loans and mortgage-backed securities to broker/dealers.  The forward sale contracts lock in an interest rate and price for the sale of loans similar to the specific rate lock commitments.  The Company does not engage in speculative trading or derivative activities.  Both the rate lock commitments to borrowers and the forward sale contracts to broker/dealers or investors are undesignated derivatives, and accordingly, are marked to fair value through earnings.  Changes in fair value measurements are included in earnings in the accompanying statements of income.

The fair value of mortgage loans held for sale is estimated based primarily on published prices for mortgage-backed securities with similar characteristics.  To calculate the effects of interest rate movements, the Company utilizes applicable published mortgage-backed security prices, and multiplies the price movement between the rate lock date and the balance sheet date by the notional loan commitment amount.  The Company applies a fallout rate to IRLCs when measuring the fair value of rate lock commitments.  Fallout is defined as locked loan commitments for which the Company does not close a mortgage loan and is based on management’s judgment and company experience.

The Company sells loans on a servicing released or servicing retained basis and receives servicing compensation.  Thus, the value of the servicing rights included in the fair value measurement is based upon contractual terms with investors and depends on the loan type. Mortgage servicing rights (Level 3 financial instruments as they are measured using significant unobservable inputs such as mortgage prepayment rates, discount rates and delinquency rates) are periodically evaluated for impairment. The amount of impairment is the amount by which the mortgage servicing rights, net of accumulated amortization, exceed their fair value, which is calculated using third-party valuations. Impairment, if any, is recognized through a valuation allowance and a reduction of revenue. Both the carrying value and fair value of our mortgage servicing rights were $16.7 million at March 31, 2023. At December 31, 2022, both the carrying value and fair value of our mortgage servicing rights were $15.8 million.

The fair value of the Company’s forward sales contracts to broker/dealers solely considers the market price movement of the same type of security between the trade date and the balance sheet date.  The market price changes are multiplied by the notional amount of the forward sales contracts to measure the fair value.

Some IRLCs are committed to a specific third-party investor through the use of whole loan delivery commitments matching the exact terms of the IRLC loan. Uncommitted IRLCs are considered derivative instruments and are fair value adjusted, with the resulting gain or loss recorded in current earnings.

The table below shows the notional amounts of our financial instruments at March 31, 2023 and December 31, 2022:

The following table sets forth the amount of gain (loss) recognized, within our revenue in the Unaudited Condensed Consolidated Statements of Income, on assets and liabilities measured on a recurring basis for the three months ended March 31, 2023 and 2022:

The following tables set forth the fair value of the Company’s derivative instruments and their location within the Unaudited Condensed Consolidated Balance Sheets for the periods indicated (except for mortgage loans held for sale which are disclosed as a separate line item):

The Company uses significant assumptions to evaluate the recoverability of its inventory, such as estimated average selling price, construction and development costs, absorption rate (reflecting any product mix change strategies implemented or to be implemented), selling strategies, alternative land uses (including disposition of all or a portion of the land owned), or discount rates. Changes in these assumptions could materially impact future cash flow and fair value estimates and may lead the Company to incur additional impairment charges in the future. Our analysis is conducted only if indicators of a decline in value of our inventory exist, which include, among other things, declines in gross margin on sales contracts in backlog or homes that have been delivered, slower than anticipated absorption pace, declines in average sales price or high incentive offers by management to improve absorptions, declines in margins regarding future land sales, or declines in the value of the land itself

as a result of third party appraisals. If communities are not recoverable based on the estimated future undiscounted cash flows, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. During the three months ended March 31, 2023 and 2022, the Company did not record any impairment charges on its inventory.

The following table presents the carrying amounts and fair values of the Company’s financial instruments at March 31, 2023 and December 31, 2022. The objective of the fair value measurement is to estimate the price at which an orderly transaction to sell the asset or transfer the liability would take place between market participants at the measurement date under current market conditions.

The following methods and assumptions were used by the Company in estimating its fair value disclosures of financial instruments at March 31, 2023 and December 31, 2022:

In the ordinary course of business, M/I Financial enters into agreements that provide a limited-life guarantee on loans sold to certain third-party purchasers of its mortgage loans that M/I Financial will repurchase a loan if certain conditions occur, primarily if the mortgagor does not meet the terms of the loan within the first six months after the sale of the loan. Loans totaling approximately $493.5 million and $360.4 million were covered under these guarantees as of March 31, 2023 and December 31, 2022, respectively.  A portion of the revenue paid to M/I Financial for providing the guarantees on these loans was deferred at March 31, 2023, and will be recognized in income as M/I Financial is released from its obligation under the guarantees. The risk associated with the guarantees above is offset by the value of the underlying assets.

M/I Financial has received inquiries concerning underwriting matters from purchasers of its loans regarding certain loans totaling approximately $1.9 million and $2.4 million at March 31, 2023 and December 31, 2022, respectively.

M/I Financial has also guaranteed the collectability of certain loans to third party insurers (U.S. Department of Housing and Urban Development and U.S. Veterans Administration) of those loans for periods ranging from five to thirty years. The maximum potential amount of future payments is equal to the outstanding loan value less the value of the underlying asset plus administrative costs incurred related to foreclosure on the loans, should this event occur.

The Company recorded a liability relating to the guarantees described above totaling $0.6 million and $0.7 million at March 31, 2023 and December 31, 2022, respectively, which is management’s best estimate of the Company’s liability with respect to such guarantees.

We use subcontractors for nearly all aspects of home construction. Although our subcontractors are generally required to repair and replace any product or labor defects, we are, during applicable warranty periods, ultimately responsible to the homeowner for making such repairs. As such, we record warranty reserves to cover our exposure to the costs for materials and labor not expected to be covered by our subcontractors to the extent they relate to warranty-type claims. Warranty reserves are established by charging cost of sales and crediting a warranty reserve for each home delivered.  The amounts charged are estimated by management to be adequate to cover expected warranty-related costs under the Company’s warranty programs. Warranty reserves are recorded for warranties under our Home Builder’s Limited Warranty (“HBLW”) and our transferable structural warranty in Other Liabilities on the Company’s Unaudited Condensed Consolidated Balance Sheets.

Our warranty reserve amounts are based upon historical experience and geographic location. While we believe that our warranty reserves are sufficient to cover our projected costs, there can be no assurances that historical data and trends will accurately predict our actual warranty costs.

A summary of warranty activity for the three months ended March 31, 2023 and 2022 is as follows:

Performance Bonds and Letters of Credit

At March 31, 2023, the Company had outstanding approximately $388.8 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) $307.1 million of performance and maintenance bonds and $69.6 million of performance letters of credit that serve as completion bonds for land development work in progress; (2) $4.0 million of financial letters of credit, of which $3.5 million represent deposits on land and lot purchase agreements; (3) $4.8 million of financial bonds; and (4) $3.3 million of corporate notes.

At March 31, 2023, the Company also had options and contingent purchase agreements to acquire land and developed lots with an aggregate purchase price of approximately $824.6 million. Purchase of properties under these agreements is contingent upon satisfaction of certain requirements by the Company and the sellers.

The Company and certain of its subsidiaries have been named as defendants in certain other legal proceedings which are incidental to our business. While management currently believes that the ultimate resolution of these other legal proceedings, individually and in the aggregate, will not have a material effect on the Company’s financial position, results of operations and cash flows, such legal proceedings are subject to inherent uncertainties. The Company has recorded a liability to provide for the anticipated costs, including legal defense costs, associated with the resolution of these other legal proceedings. However, the possibility exists that the costs to resolve these legal proceedings could differ from the recorded estimates and, therefore, have a material effect on the Company’s net income for the periods in which they are resolved. At both March 31, 2023 and December 31, 2022, we had $1.2 million reserved for legal expenses.

Goodwill represents the excess of the purchase price paid over the fair value of the net assets acquired and liabilities assumed in business combinations. In connection with the Company’s acquisition of the homebuilding assets and operations of Pinnacle Homes in Detroit, Michigan in March of 2018, the Company recorded goodwill of $16.4 million, which is included as Goodwill in our Consolidated Balance Sheets. This amount was based on the estimated fair values of the acquired assets and liabilities at the date of the acquisition in accordance with ASC 350.

In accordance with ASC 350, the Company analyzes goodwill for impairment on an annual basis (or more often if indicators of impairment exist). The Company performs a qualitative assessment to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its

carrying amount. If the qualitative assessment indicates that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, then a quantitative assessment is performed to determine the reporting unit’s fair value. If the reporting unit’s carrying value exceeds its fair value, then an impairment loss is recognized for the amount of the excess of the carrying amount over the reporting unit’s fair value. The Company performed its annual goodwill impairment analysis via a quantitative test during the fourth quarter of 2022, and there was no impairment recorded at December 31, 2022. At March 31, 2023, no indicators for impairment existed and therefore no impairment was recorded. However, we will continue to monitor the fair value of the reporting unit in future periods if conditions worsen or other events occur that could impact the fair value of the reporting unit.

The Credit Facility provides for an aggregate commitment amount of $650 million and also includes an accordion feature pursuant to which the maximum borrowing availability may be increased to an aggregate of $800 million, subject to obtaining additional commitments from lenders. The Credit Facility matures on December 9, 2026. Interest on amounts borrowed under the Credit Facility is payable at multiple interest rate options including one, three or six month adjusted term SOFR (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 also contains certain financial covenants. At March 31, 2023, the Company was in compliance with all financial covenants of 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 in accordance with the terms of the Credit Facility and the indentures governing the Company’s $300.0 million aggregate principal amount of 3.95% Senior Notes due 2030 (the “2030 Senior Notes”) and the Company’s $400.0 million aggregate principal amount of 4.95% Senior Notes due 2028 (the “2028 Senior Notes”). The guarantors for the Credit Facility (the “Subsidiary Guarantors”) are the same subsidiaries that guarantee the 2030 Senior Notes and the 2028 Senior Notes.

The Company’s obligations under the Credit Facility are general, unsecured senior obligations of the Company and the Subsidiary Guarantors and rank equally in right of payment with all our and the Subsidiary Guarantors’ existing and future unsecured senior indebtedness. Our obligations under the Credit Facility are effectively subordinated to our and the Subsidiary Guarantors’ existing and future secured indebtedness with respect to any assets comprising security or collateral for such indebtedness.

Notes Payable - Financial Services

The MIF Mortgage Warehousing Agreement is used to finance eligible residential mortgage loans originated by M/I Financial. The MIF Mortgage Warehousing Agreement provides for a maximum borrowing availability of $200 million, which increased to $275 million from September 19, 2022 to November 13, 2022 and increased to $300 million from November 14, 2022 to February 6, 2023, which are periods of expected increases in the volume of mortgage originations. The MIF Mortgage Warehousing Agreement expires on May 26, 2023. Interest on amounts borrowed under the MIF Mortgage Warehousing Agreement is payable at a per annum rate equal to the one-month BSBY rate (adjusting daily subject to a floor of 0.25%) plus a

spread of 190 basis points. The MIF Mortgage Warehousing Agreement also contains certain financial covenants. At March 31, 2023, M/I Financial was in compliance with all financial covenants of the MIF Mortgage Warehousing Agreement.

The MIF Mortgage Repurchase Facility is used to finance eligible residential mortgage loans originated by M/I Financial. The MIF Mortgage Repurchase Facility provides for a mortgage repurchase facility with a maximum borrowing availability of $90 million. The MIF Mortgage Repurchase Facility expires on October 23, 2023. M/I Financial pays interest on each advance under the MIF Mortgage Repurchase Facility at a per annum rate equal to One-Month Term SOFR (subject to an all-in floor of 2.375% or 2.75% based on the type of loan) and adjusts certain financial covenant limits, plus 150 or 200 basis points depending on the loan type. The MIF Mortgage Repurchase Facility also contains certain financial covenants. At March 31, 2023, M/I Financial was in compliance with all financial covenants of the MIF Mortgage Repurchase Facility.

At March 31, 2023 and December 31, 2022, M/I Financial’s total combined maximum borrowing availability under the two credit facilities was $290.0 million and $390.0 million, respectively. At March 31, 2023 and December 31, 2022, M/I Financial had $223.6 million and $245.7 million, respectively, in borrowings outstanding on a combined basis under its credit facilities.

As of both March 31, 2023 and December 31, 2022, we had $300.0 million of our 2030 Senior Notes outstanding. The 2030 Senior Notes bear interest at a rate of 3.95% per year, payable semiannually in arrears on February 15 and August 15 of each year, and mature on February 15, 2030. The Company may redeem some or all of the 2030 Senior Notes at any time prior to August 15, 2029 (the date that is six months prior to the maturity of the 2030 Senior Notes), at a redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but not including, the redemption date, plus a “make-whole” amount set forth in the indenture governing the 2030 Senior Notes. In addition, on or after August 15, 2029 (the date that is six months prior to the maturity of the 2030 Senior Notes), the Company may redeem some or all of the 2030 Senior Notes at a redemption price equal to 100.000% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but not including, the redemption date.

As of both March 31, 2023 and December 31, 2022, we had $400.0 million of our 2028 Senior Notes outstanding. The 2028 Senior Notes bear interest at a rate of 4.95% per year, payable semiannually in arrears on February 1 and August 1 of each year and mature on February 1, 2028. We may redeem all or any portion of the 2028 Senior Notes at a stated redemption price, together with accrued and unpaid interest thereon. The redemption price is currently 103.713% of the principal amount outstanding, but will decline to 102.475% of the principal amount outstanding if redeemed during the 12-month period beginning on February 1, 2024, will further decline to 101.238% of the principal amount outstanding if redeemed during the 12-month period beginning on February 1, 2025 and will further decline to 100.000% of the principal amount outstanding if redeemed on or after February 1, 2026, but prior to maturity.

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 of March 31, 2023, the Company was in compliance with all terms, conditions, and covenants under the indenture.

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 of March 31, 2023, the Company was in compliance with all terms, conditions, and covenants under the indenture.

The Inflation Reduction Act (IRA) was enacted on August 16, 2022 to address the high cost of prescription drugs, healthcare availability, climate change and inflation. The IRA extended the energy efficient homes credit through 2032 and, as a result, the Company recognized an $0.9 million tax benefit during the first quarter of 2023.

During the three months ended March 31, 2023 and 2022, the Company recorded a tax provision of $32.9 million and $30.4 million, respectively, which reflects income tax expense related to income before income taxes for the periods. The effective tax rate for the three months ended March 31, 2023 and 2022 was 24.2% and 24.9%, respectively. The decrease in the effective rate from the three months ended March 31, 2023 was primarily attributable to an increase in tax benefit from energy efficient home credits during the first quarter of 2023.

NOTE 11. Business Segments

The Company’s chief operating decision makers evaluate the Company’s performance in various ways, including: (1) the results of our individual homebuilding operating segments and the results of our financial services operations; (2) the results of our homebuilding reportable segments; and (3) our consolidated financial results.

The following table shows, by segment, revenue, operating income (loss) and interest (income) expense for the three months ended March 31, 2023 and 2022, as well as the Company’s income before income taxes for such periods:

NOTE 12. Share Repurchase Program

On July 28, 2021, the Company announced that its Board of Directors approved a new share repurchase program pursuant to which the Company may purchase up to $100 million of its outstanding common shares (the “2021 Share Repurchase Program”). On February 17, 2022, the Company announced that its Board of Directors approved an increase to its 2021 Share Repurchase Program by an additional $100 million.

Pursuant to the 2021 Share Repurchase Program, the Company may purchase up to $200 million of its outstanding common shares through open market transactions, privately negotiated transactions or otherwise in accordance with all applicable laws. The timing, amount and other terms and conditions of any additional repurchases under the 2021 Share Repurchase Program will be 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 Share Repurchase Program does not have an expiration date and the Board may modify, discontinue or suspend it at any time.

The Company did not repurchase any outstanding common shares during the first quarter of 2023. As of March 31, 2023, $93.1 million remained available for repurchases under the 2021 Share Repurchase Program.

NOTE 13. Revenue Recognition

Revenue and the related profit from the sale of a home and revenue and the related profit from the sale of land to third parties are recognized in the financial statements on the date of closing if delivery has occurred, title has passed to the buyer, all performance obligations (as defined below) have been met, and control of the home or land is transferred to the buyer in an amount that reflects the consideration we expect to be entitled to receive in exchange for the home or land. If not received immediately upon closing, cash proceeds from home closings are held in escrow for the Company’s benefit, typically for up to three days, and are included in Cash, cash equivalents and restricted cash on the Condensed Consolidated Balance Sheets.

Sales incentives vary by type of incentive and by amount on a community-by-community and home-by-home basis. The costs of any sales incentives in the form of free or discounted products and services provided to homebuyers are reflected in Land and housing costs in the Condensed Consolidated Statements of Income because such incentives are identified in our home purchase contracts with homebuyers as an intrinsic part of our single performance obligation to deliver and transfer title to their home for the transaction price stated in the contracts. Sales incentives that we may provide in the form of closing cost allowances are recorded as a reduction of housing revenue at the time the home is delivered.

We record sales commissions within Selling expenses in the Condensed Consolidated Statements of Income when incurred (i.e., when the home is delivered) as the amortization period is generally one year or less and therefore capitalization is not required as part of the practical expedient for incremental costs of obtaining a contract.

Contract liabilities include customer deposits related to sold but undelivered homes. Substantially all of our home sales are scheduled to close and be recorded to revenue within one year from the date of receiving a customer deposit. Contract liabilities expected to be recognized as revenue, excluding revenue pertaining to contracts that have an original expected duration of one year or less, is not material.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. All of our home purchase contracts have a single performance obligation as the promise to transfer the home is not separately identifiable from other promises in the contract and, therefore, not distinct. Our performance obligation, to deliver the agreed-upon home, is generally satisfied in less than one year from the original contract date. Deferred revenue resulting from uncompleted performance obligations existing at the time we deliver new homes to our homebuyers is not material.

Although our third party land sale contracts may include multiple performance obligations, the revenue we expect to recognize in any future year related to remaining performance obligations, excluding revenue pertaining to contracts that have an original expected duration of one year or less, is not material. We do not disclose the value of unsatisfied performance obligations for land sale contracts with an original expected duration of one year or less.

NOTE 14. Stock-Based Compensation

The Company maintains the M/I Homes, Inc. 2018 Long-Term Incentive Plan (the “2018 LTIP”), an equity compensation plan administered by the Compensation Committee of our Board of Directors. Under the 2018 LTIP, the Company is permitted to grant (1) nonqualified stock options to purchase common shares, (2) incentive stock options to purchase common shares, (3) stock appreciation rights, (4) restricted common shares, (5) other stock-based awards (awards that are valued in whole or in part by reference to, or otherwise based on, the fair market value of our common shares), and (6) cash-based awards to its officers, employees, non-employee directors and other eligible participants. Subject to certain adjustments, the 2018 LTIP authorizes awards to officers, employees, non-employee directors and other eligible participants for up to 4,217,436 common shares, of which 1,338,412 remain available for grant at March 31, 2023.

The 2018 LTIP replaced the M/I Homes, Inc. 2009 Long-Term Incentive Plan (the “2009 LTIP”), which was terminated immediately following our 2018 Annual Meeting of Shareholders. Awards outstanding under the 2009 LTIP Plan remain in effect in accordance with their respective terms.

On February 15, 2023, February 17, 2022 and February 16, 2021, the Company awarded its executive officers (in the aggregate) a target number of performance share units (“PSU’s”) equal to 27,243, 33,619 and 30,875 PSU’s, respectively. Each PSU represents a contingent right to receive one common share of the Company if vesting is satisfied at the end of a three-year performance period (the “Performance Period”). The ultimate number of PSU’s that will vest and be earned, if any, after the completion of the Performance Period, is based on (1) (a) the Company’s cumulative annual pre-tax income from operations, excluding extraordinary items, as defined in the underlying award agreements with the executive officers, over the Performance Period (weighted 80%) (the “Performance Condition”), and (b) the Company’s relative total shareholder return over the Performance Period compared to the total shareholder return of a peer group of other publicly-traded homebuilders (weighted 20%) (the “Market Condition”) and (2) the participant’s continued employment through the end of the Performance Period, except in the case of termination due to death, disability or retirement or involuntary termination without cause by the Company. The number of PSU’s that vest may increase by up to 50% from the target number based on levels of achievement of the above criteria as set forth in the applicable award agreements and decrease to zero if the Company fails to meet the minimum performance levels for both of the above criteria. If the Company achieves the minimum performance levels for both of the above criteria, 50% of the target number of PSU’s will vest and be earned. Any portion of PSU’s that does not vest at the end of the Performance Period will be forfeited. Additionally, the PSU’s have no dividend or voting rights during the Performance Period.

The grant date fair value of the portion of the PSU’s subject to the Performance Condition and the Market Condition component was $58.73 and $64.45 for the 2023 PSU’s, respectively, $47.59 and $50.51 for the 2022 PSU’s, respectively, and $51.82 and $56.44 for the 2021 PSU’s, respectively. In accordance with ASC 718, for the portion of the PSU’s subject to a Market Condition, stock-based compensation expense is derived using the Monte Carlo simulation methodology and is recognized ratably over the service period regardless of whether or not the attainment of the Market Condition is probable. Therefore, the Company recognized less than $0.1 million in stock-based compensation expense during the first quarter of 2023 related to the Market Condition portion of the 2023, 2022 and 2021 PSU awards. There was a total of $0.3 million of unrecognized stock-based compensation expense related to the Market Condition portion of the 2023, 2022 and 2021 PSU awards as of March 31, 2023.

For the portion of the PSU’s subject to the Performance Condition, we recognize stock-based compensation expense on a straight-line basis over the Performance Period based on the probable outcome of the related Performance Condition. Otherwise, stock-based compensation expense recognition is deferred until probability is attained and a cumulative stock-based compensation expense adjustment is recorded and recognized ratably over the remaining service period. The Company reassesses the probability of the satisfaction of the Performance Condition on a quarterly basis, and stock-based compensation expense is adjusted based on the portion of the requisite service period that has passed. As of March 31, 2023, the Company had not recognized any stock-based compensation expense related to the Performance Condition portion of the 2023 and 2022 PSU awards. If the Company achieves the minimum performance levels for the Performance Conditions to be met for the 2023 and 2022 PSU awards, the Company would record unrecognized stock-based compensation expense of $1.0 million as of March 31, 2023, for which $0.3 million would be immediately recognized had attainment been probable at March 31, 2023. The Company recognized a total of $0.2 million of stock-based compensation expense related to the Performance Condition portion of the 2021 PSU awards during the first quarter of 2023 based on the probability of attaining the respective performance conditions. The Company has a total of $0.5 million of unrecognized stock-based compensation expense for the 2021 PSU awards as of March 31, 2023.

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

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 145,600 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 in Columbus and Cincinnati, Ohio; Indianapolis, Indiana; Chicago, Illinois; Minneapolis/St. Paul, Minnesota; Detroit, Michigan; Ft. Myers/Naples, Tampa, Sarasota and Orlando, Florida; Austin, Dallas/Fort Worth, Houston and San Antonio, Texas; Charlotte and Raleigh, North Carolina; and Nashville, 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:

FORWARD-LOOKING STATEMENTS

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.

The preparation of financial statements in conformity with accounting principles generally accepted in the 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 2022 Form 10-K for additional information about our accounting policies.

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:

Despite the challenges impacting the homebuilding industry, we achieved the following results during the first quarter of 2023 in comparison to the first quarter of 2022:

These increases reflect the strong demand for our homes that existed through the first half of 2022, as many of the homes delivered in the first quarter of 2023 were placed under contract prior to the softening of demand in the latter half of 2022.

Our company-wide absorption pace of sales per community for the first quarter of 2023 declined to 3.7 per month compared to 4.8 per month for the prior year’s first quarter as a result of increased average community count to 198 for the first quarter of 2023 from 176 for the first quarter of 2022 and the decrease in the number of new contracts during the quarter compared to prior year. We plan to open a number of new communities in 2023, increasing our community count by approximately 15% from the end of 2022. However, given the uncertainty in the housing market as a result of current economic conditions, we may choose to delay the development and opening of some new communities to match homebuyer demand in the remainder of 2023.

Income before income taxes for the first quarter of 2023 increased 11% from $122.3 million in the first quarter of 2022 to a first quarter record $136.0 million in 2023. We also achieved first quarter record net income of $103.1 million, or $3.64 per diluted share, in 2023's first quarter, compared to net income of $91.8 million, or $3.16 per diluted share, in 2022's first quarter. Our effective tax rate was 24.2% in 2023’s first quarter compared to 24.9% in 2022.

During the quarter ended March 31, 2023, we recorded first quarter record total revenue of $1.00 billion, of which $974.9 million was from homes delivered, $0.3 million was from land sales and $25.3 million was from our financial services operations. Revenue from homes delivered increased 17% in 2023's first quarter compared to the same period in 2022 driven primarily by a 6% increase in the average sales price of homes delivered ($29,000 per home delivered) and a 10% increase in the number of homes delivered (184 units). The increases were due primarily to the robust consumer demand in early 2022 when the majority of our homes delivered during the quarter were placed under contract. Revenue from land sales decreased $3.2 million from the first quarter of 2022 due to fewer land sales in the current year period compared to prior year. Revenue from our financial services segment increased 5% to $25.3 million in the first quarter of 2023 as a result of an increase in the average loan amount and slightly higher margins on loans sold during the period compared to the first quarter of 2022, offset partially by a decrease in loans closed compared to the first quarter of 2023.

Total gross margin (total revenue less total land and housing costs) increased $21.5 million in the first quarter of 2023 compared to the first quarter of 2022 as a result of a $20.3 million improvement in the gross margin of our homebuilding operations (housing gross margin and land sales gross margin) and a $1.2 million increase 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) increased $21.3 million primarily as a result of the 6% increase in average sales price of homes delivered and the 10% increase in the number of homes delivered. Our housing gross margin percentage declined 110 basis points from 22.6% in prior year's first quarter to 21.5% in 2023's first quarter, primarily as a result of increased construction and lot costs, offset partially by the increase in average sales price of homes delivered compared to prior year. 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. Our gross margin on land sales (land sale gross margin) declined $1.0 million in the first quarter of 2023 compared to the first quarter of 2022 as a result of fewer land sales in the current year first quarter compared to the prior year. The gross margin of our financial services operations increased $1.2 million in the first quarter of 2023 compared to the first quarter of 2022 as a result of slightly higher margins on loans sold and an increase in the average loan amount during the first quarter of 2023 compared to the first quarter of 2022, partially offset by a decrease in the number of loan originations.

Headwinds from supply chain issues and regulatory delays have impacted development completions and model openings which have delayed planned community openings. We opened 19 new communities during the first quarter of 2023 and closed 15 communities.

For the three months ended March 31, 2023, selling, general and administrative expense increased $9.8 million, which partially offset the increase in our total gross margin discussed above, but improved as a percentage of revenue from 10.5% in the first quarter of 2022 to 10.0% in the first quarter of 2023 (a first quarter record). Selling expense increased $7.6 million from 2022's first quarter and increased as a percentage of revenue to 4.9% in 2023's first quarter from 4.8% for the same period in 2022. Variable selling expense for sales commissions contributed $6.5 million to the increase due to the higher number of homes delivered during the first quarter of 2023. Non-variable selling expense increased $1.1 million primarily as a result of increased costs associated with our sales offices and models. General and administrative expense increased $2.2 million compared to the first quarter of 2022 and improved as a percentage of revenue from 5.7% in the first quarter of 2022 to 5.1% in the first quarter of 2023. The increase in general and administrative expense was primarily due to an increase in compensation-related expenses due to our strong financial performance during the quarter.

Housing market conditions remained uncertain during the first quarter of 2023, resulting in weaker overall demand for new homes compared to the same period last year. We attribute this decline in demand to various macroeconomic conditions, including steep increases in mortgage rates since January 2022, substantial increases in home prices over the past two years, the high rate of inflation, and economic recession concerns of our potential homebuyers. The extent to which these factors will continue to impact our business is highly uncertain and unpredictable, and our past performance should not be considered indicative of our future results on any metric or set of metrics given the uncertainty in the U.S. economy.

Despite these negative economic developments, we believe that the homebuilding industry will continue to benefit over the long term from a continued undersupply of available homes, positive consumer demographics, scarcity of rentals and increasing rent prices.

We believe that we are well positioned to manage through these challenging economic conditions with our affordable product offerings, lot supply and planned new community openings. We remain sensitive to the changes in market conditions, and continue to focus on controlling overhead leverage, carefully managing our investment in land and land development spending and offering incentives, including mortgage interest rate buy-downs, to retain our backlog and improve our sales pace. Our strong balance sheet and liquidity position should also provide us with the flexibility to operate effectively through changing economic conditions. However, we cannot provide any assurances that the strategic business objectives listed below will remain successful, and we may need to adjust elements of our strategy to effectively address evolving market conditions.

We expect to emphasize the following strategic business objectives throughout the remainder of 2023 and into 2024:

During the first three months of 2023, we invested $45.6 million in land acquisitions and $92.4 million in land development. We invested in fewer land acquisitions in the first quarter of 2023 compared to prior year’s first quarter due to declining demand for new homes and invested more in land development to finish lots needed to start homes and allow us to open new communities in an effort to increase demand and sales. 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 and investment spend accordingly. However, as a result of the impacts of current market conditions and municipality delays, we are not providing land spending estimates for 2023 at this time.

We ended the first quarter of 2023 with approximately 40,700 lots under control, which represents approximately a 5-year supply of lots based on the past twelve months of homes delivered, including certain lots that we anticipate selling to third parties. This represents a 11% decrease from our approximately 45,800 lots under control at the end of last year’s first quarter.

We opened 19 communities and closed 15 communities in the first quarter of 2023, ending the first quarter with 200 active communities, compared to 176 at the end of last year’s first quarter. Although the timing of opening new communities and closing existing communities is subject to substantial variation, we expect to grow our community count by approximately 15% by the end of 2023.

While we believe the remainder of 2023 will be very challenging compared to the strong market conditions during the first half of 2022 and the previous few years, we also believe that we are well positioned with a strong balance sheet and backlog to manage through the current economic environment. However, the challenging macroeconomic conditions described above could materially and negatively affect our performance in 2023, particularly when compared to our performance over the past few years.

Future economic and homebuilding industry conditions and the demand for homes are subject to continued uncertainty due to many factors, including the impacts of increased mortgage interest rates, inflation, materials and labor cost increases, supply chain disruptions and labor shortages, and the further impact of these actions on the economy, employment levels, consumer confidence, and financial markets, among other things. These factors are highly uncertain and outside our control. As a result, our past performance may not be indicative of future results.

The following table shows, by segment: revenue; gross margin; selling, general and administrative expense; operating income (loss); and interest expense (income) for the three months ended March 31, 2023 and 2022: