PART I
Item 1. BUSINESS
General
M/I Homes, Inc. and subsidiaries (the “Company,” “we,” “us” or “our”) is one of the nation's leading builders of single-family homes. The Company was incorporated, through predecessor entities, in 1973 and commenced homebuilding activities in 1976. Since that time, the Company has delivered over 80,000 homes, including 2,278 in 2011.
The Company consists of two distinct operations and reporting segments: homebuilding and financial services. Our homebuilding operations, for reporting purposes, are divided into three reporting segments - the Midwest, Mid-Atlantic and Southern regions. Our financial services operations support our homebuilding operations by providing mortgage loans and title services to the customers of our homebuilding operations.
Our homebuilding operations comprise the most substantial portion of our business, representing 97% of consolidated revenue during 2011 and 98% of consolidated revenue during 2010. We design, market, construct and sell single-family homes, attached townhomes, and condominiums to first-time, move-up, empty-nester and luxury buyers, with a particular focus on first-time and value-focused buyers. Our homes are offered primarily in development communities and mixed-use communities. We use the term “home” to refer to a single-family residence, whether it is a single-family home or other type of residential property, and we use the term “community” to refer to a single development in which homes are constructed as part of an integrated plan. We are currently offering homes for sale in 122 communities within 11 markets located in nine states. We offer a variety of homestyles at base prices ranging from approximately $107,000 to $1,000,000, with an average sales price in 2011, including options, of $242,000. Offering homes at a variety of price points allows us to attract a wide range of buyers. We believe that we distinguish ourselves from competitors by offering homes in select areas with a high level of design and construction quality within a given price range, and by providing customers with the confidence they can only get from superior customer service. In addition to home sales, our homebuilding operations occasionally generate revenue from the sale of land and lots.
Our financial services operations generate revenue from originating and selling mortgages and collecting fees for title insurance and closing services. We offer mortgage banking services to our homebuyers through our wholly-owned subsidiary, M/I Financial Corp. (“M/I Financial”). Our title services are offered through subsidiaries that are either wholly- or majority owned by the Company. Our financial services operations accounted for 3% of our consolidated revenues in 2011 and 2% of our consolidated revenues in 2010.
In 2011, we generated total revenues of $566.4 million and a net loss of $33.9 million, compared to total revenues of $616.4 million and a net loss of $26.3 million in 2010. At December 31, 2011, we had 676 homes in backlog with a sales value of $180.7 million compared to 532 homes in backlog with a sales value of $135.2 million at December 31, 2010. Our financial results for 2011 and 2010 reflect challenging operating conditions that have persisted in the homebuilding industry to varying degrees since a general housing market downturn began in mid-2006, as well as strategic actions taken by us since the downturn began in an effort to align our operations with these changing market conditions and maintain a strong financial position.
Our principal executive offices are located at 3 Easton Oval, Suite 500, Columbus, Ohio 43219. The telephone number of our corporate headquarters is (614) 418-4000 and our website address is http://mihomes.com. Information on our web site is not a part of this Form 10-K.
Markets
Our 11 homebuilding divisions are organized into the following three segments for reporting purposes:
Region
Market/Division
Year Operations Commenced
Midwest
Columbus, Ohio
1976
Cincinnati, Ohio
1988
Indianapolis, Indiana
Chicago, Illinois
2007
Southern
Tampa, Florida
1981
Orlando, Florida
1984
Houston, Texas
2010
San Antonio, Texas
2011
Mid-Atlantic
Charlotte, North Carolina
1985
Raleigh, North Carolina
1986
Washington, D.C.
1991
We believe we have experienced management teams in each of our divisions, with local market expertise. We believe that our business requires in-depth knowledge of local markets in order to acquire land in desirable locations and on favorable terms, to engage subcontractors, to plan communities that meet local demand, to anticipate consumer tastes in specific markets, and to assess local regulatory environments. Though we centralize certain functions (such as marketing, legal, purchasing administration, product development, accounting and human resources) to benefit from economies of scale, our local management, while generally supervised by a Region President, exercises considerable autonomy in identifying land acquisition opportunities, developing and implementing product and sales strategies, and controlling costs.
Business Strategy
New home sales across most housing markets in the United States remained at historically low levels in 2011. Many of these markets, including those we serve, experienced a prolonged downturn in demand from mid-2006 through 2009, compared to the period from 2000 through 2005, and the levels of housing permits and new home sales did not increase in 2010 or 2011. Instead, market activity largely held steady, without further substantial declines. Although the economy has started to show signs of improvement, new home sales have continued to decrease nationally since 2009, with 302,000 new homes sold in the U.S. in 2011, compared with 323,000 sold in 2010 and 375,000 sold in 2009.
The downturn in the housing market, which started even sooner in our Midwest markets, resulted in substantial losses for the homebuilding industry and led to a severe decline in our profitability. A persistent oversupply of homes for sale, coupled with weak consumer demand for housing, started to impact the homebuilding industry in mid-2006. Our operating and financial results, like many other homebuilders during this time, suffered materially. We experienced declines in new contracts, active communities, revenue, and gross profit, and we incurred substantial asset impairment charges and net losses for the years 2007, 2008 and 2009. Worldwide financial and credit market turbulence, which began in mid-2008, further exacerbated this downturn and macroeconomic conditions. We believe the availability of the federal homebuyer tax credit increased our new contracts in the first four months of 2010; however, upon its expiration, demand for housing once again became sluggish due to an overall weak economy, without substantial job growth, low levels of consumer confidence, an excess supply of homes for sale and tighter mortgage credit conditions.
These conditions did not change markedly in 2011. Despite the lack of recovery in the housing market, we have been able to achieve certain improvements in our operating performance over the past three years through execution of our business strategy which focuses on the following integrated objectives:
From 2007 through the first half of 2009, we employed a defensive operating strategy designed to strengthen our balance sheet, improve liquidity, generate cash flow, improve our cost structure, reduce our overhead, and improve certain operating processes and procedures. During this period, we sought to right-size our operations to reflect current demand, reduce our overhead cost structure, improve our operations from both a customer and build cycle-time perspective, redesign our product to address changing consumer preferences, re-engineer our product to reduce our cost to build, redeploy our investments to higher margin opportunities where possible and carefully manage our investment in new land and lots. The actions we took to support these initiatives resulted in material reductions in our controlled land and lots, active community count, employee headcount, and overhead expenses. We also improved our gross margins, generated significant cash from operations, and ultimately reduced our adjusted pre-tax losses (our adjusted pre-tax losses, which constitutes a non-GAAP financial measure, is reconciled to our loss before income taxes on page 35 of this Annual Report on Form 10-K) from 2007 through 2010. Our adjusted pre-tax loss increased, however, in 2011, to $10.9 million, from $7.7 million in 2010. This decline was primarily due to stronger new contracts in early 2010 as homebuyers sought to take advantage of the then-available federal homebuyer tax credit. In addition, we incurred higher interest costs in 2011 when compared to 2010 as a result of the refinancing of our senior notes due in 2012 in the last quarter of 2010. However, our adjusted pre-tax loss improved in the second half of 2011 when compared with the second half 2010.
In 2010 and 2011, we maintained the fundamentals of our disciplined defensive operating strategy, while we also began to focus more on the objectives within our business strategy that would position us for a recovery, primarily by investing in new communities and/or markets for modest growth overall. In late 2009, we began to see more opportunities to purchase land and lots in our existing markets that met our stringent investment and marketing standards. As a result, in 2010, we purchased more land and lots than we purchased in 2009, opened 41 new communities and increased our controlled land position by 9%. While we continued to invest in land and lots in 2011, we remained cautious due to the uncertain conditions in the housing markets, and thus we invested $35.7 million less in new land than we did in 2010, while our total controlled land position remained largely unchanged, at 10,353 lots. Although continued reinvestment in new communities (defined as communities opened after January 1, 2009) and completing our involvement in older communities remain
important elements of our operating strategy, we have only marginally increased our level of new investment. We believe this deliberate approach will help restore our homebuilding operations to profitability through higher margin communities and increasing our market presence. Currently, over 65% of our active communities are new and on average, their gross margins are 500 basis points higher than our older "legacy" communities. In addition to our investment in new communities in our existing markets, in 2011, we purchased a small homebuilder in San Antonio, Texas in April 2011, expanding our geographic footprint.