[Home]

Management's Discussion of Results of Operations (Excerpts)

For purposes of readability, Zenith attempts to strip out all tables in excerpts from the Management Discussion. That information is contained elsewhere in our articles. The idea of this summary is simply to review how well we believe Management does its reporting. Also, this highlights what Management believes is important.

In our Decision Matrix at the end of each article, a company with 0 to 2 gets a "-1", and 3 to 5 gets a "+1."

On a scale of 0 to 5, 5 being best, Zenith rates this company's Management's Discussion as a 4.


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 114,800 homes 
since we commenced homebuilding activities in 1976. The Company’s homes are 
marketed and sold primarily under the M/I Homes brand (M/I Homes and Showcase 
Collection (exclusively by M/I)). In addition, the Hans Hagen brand is used in 
older communities in our Minneapolis/St. Paul, Minnesota market, and, following 
our acquisition of the homebuilding assets and operations of Pinnacle Homes, a 
privately-held homebuilder in the Detroit, Michigan market (“Pinnacle Homes”), 
in March 2018, the Pinnacle Homes brand is used in certain communities in that 
market. The Company has homebuilding operations in Columbus and Cincinnati, 
Ohio; Indianapolis, Indiana; Chicago, Illinois; Minneapolis/St. Paul, 
Minnesota; Detroit, Michigan; Tampa, Sarasota and Orlando, Florida; Austin, 
Dallas/Fort Worth, Houston and San Antonio, Texas; Charlotte and Raleigh, North 
Carolina; and the Virginia and Maryland suburbs of Washington, D.C. (see “- 
Results of Operations - Overview” for more information regarding our decision 
in the first quarter of 2019 to wind down our Washington D.C. operations). 
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:

•

Information Relating to Forward-Looking Statements;

•

Application of Critical Accounting Estimates and Policies;

•

Results of Operations;

•

Discussion of Our Liquidity and Capital Resources;

•

Summary of Our Contractual Obligations;

•

Discussion of Our Utilization of Off-Balance Sheet Arrangements; and

•

Impact of Interest Rates and Inflation.


RESULTS OF OPERATIONS During 2019, we decided to wind down our Washington, D.C. 
operations, which we expect to substantially complete by the end of 2019. As a 
result, during the second quarter of 2019, we re-evaluated our reportable 
segments and determined that none of our separate Mid-Atlantic operating 
segments met the reportable criteria set forth in ASC 280, Segment Reporting 
(“ASC 280”). Therefore, we elected to aggregate our Charlotte and Raleigh, 
North Carolina and Washington, D.C. operating segments into our existing 
Southern region based on the aggregation criteria described in Note 11. All 
prior year segment information has been recast to conform with the 2019 
presentation. The change in the reportable segments has no effect on the 
Company's condensed consolidated balance sheets, statement of income or 
statement of cash flows for the periods presented. As a result of this 
re-evaluation, we have determined 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:

Northern

Southern Chicago, Illinois

Orlando, Florida Cincinnati, Ohio

Sarasota, Florida Columbus, Ohio

Tampa, Florida Indianapolis, Indiana

Austin, Texas Minneapolis/St. Paul, Minnesota

Dallas/Fort Worth, Texas Detroit, Michigan

Houston, Texas


San Antonio, Texas


Charlotte, North Carolina


Raleigh, North Carolina


Washington, D.C. (a)

(a)

During 2019, we decided to wind down our Washington, D.C. operations, which we 
expect to substantially complete by the end of 2019.

Overview For both the second quarter and first half of 2019, we achieved record 
levels of new contracts, homes delivered, revenue and net income. We also 
reached record-high income before income taxes of $41.2 million during 2019’s 
second quarter, increasing 23% over 2018’s $33.5 million. This improvement 
reflects higher homes delivered, a higher average closing price, improved 
overhead leverage and lower acquisition-related expenses in 2019, offset by a 
decline in gross margin percentage which is primarily due to rising labor 
costs. Our complementary financial services business also achieved record 
revenue in the second quarter and a record number of loans originated in both 
the second quarter and first half of 2019. Fundamental housing market factors 
were generally favorable in 2019's first half, with strong employment levels, 
relatively high consumer confidence and a limited supply of homes available for 
sale. We believe housing market conditions will remain relatively favorable 
during the remainder of 2019. However, we also believe rising land and labor 
costs may continue to impose pressure on affordability levels in many of our 
markets. Favorable market conditions along with the execution of our strategic 
business initiatives enabled us to achieve the following record results during 
the quarter and first half ended June 30, 2019 in comparison to the second 
quarter and first half of 2018:

•

New contracts increased 6% to1,731 and less than 1% to 3,375, respectively

•

Homes delivered increased 9% to 1,538 homes and 8% to 2,724 homes, respectively

•

Average sales price of homes delivered increased 1% to $389,000 and 3% to 
$391,000, respectively

•

Revenue increased 12% to $623.7 million and 11% to $1.1 billion, respectively

•

Number of active communities at June 30, 2019 increased 5% to 220 - an all-time 
record for the Company In addition to the record results described above, while 
not a second quarter record, our backlog sales value exceeded $1.12 billion at 
the end of the second quarter, and our company-wide absorption pace of sales 
per community for the second quarter of 2019 was 2.7 per month versus 2.6 per 
month for 2019’s first quarter. Summary of Company Financial Results The 
calculations of adjusted income before income taxes, adjusted net income, and 
adjusted housing gross margin, which we believe provide a clearer measure of 
the ongoing performance of our business, are described and reconciled to income 
before income taxes, net income, and housing gross margin, the financial 
measures that are calculated using our GAAP results, below under “Non-GAAP 
Financial Measures.” Income before income taxes for the second quarter of 2019 
increased 22.9% from $33.5 million in the second quarter of 2018 to $41.2 
million in the second quarter 2019. Income before income taxes for the three 
months ended June 30, 2019 and 2018 was unfavorably impacted by $0.1 million 
and $3.0 million of acquisition-related charges as a result of our acquisition 
of Pinnacle Homes in March 2018, respectively. Excluding these 
acquisition-related charges for both the three months ended June 30, 2019 and 
2018, adjusted income before income taxes increased 13% from $36.5 million in 
the second quarter of 2018 to $41.3 million in the second quarter 2019. For the 
six months ended June 30, 2019, income before income taxes increased 13% from 
$57.4 million for the first half of 2018 to $64.7 million. Income before income 
taxes for the six months ended June 30, 2019 was unfavorably impacted by $0.6 
million of acquisition-related charges as a result of our acquisition of 
Pinnacle Homes in March 2018. Income before income taxes for the six months 
ended June 30, 2018 was unfavorably impacted by $3.9 million of 
acquisition-related charges and $1.7 million of acquisition and integration 
costs, which were incurred as a result of our acquisition of Pinnacle Homes. 
Excluding these acquisition-related charges for both the first half of 2019 and 
2018, adjusted income before income taxes increased 4% from $63.0 million in 
2018's first half to $65.2 million in 2019's first half. We achieved net income 
of $30.2 million, or $1.08 per diluted share, in 2019's second quarter, which 
included $0.1 million of pre-tax acquisition-related charges as discussed 
above. This compares to net income of $27.9 million, or $0.96 per diluted 
share, in 2018's second quarter, which included $3.0 million of pre-tax 
acquisition-related charges ($0.08 per diluted share) as discussed above. 
Exclusive of these charges in both periods, our adjusted net income increased 
$0.2 million to $30.3 million in the second quarter of 2019 compared to $30.1 
million in the prior year. Our effective tax rate was 26.6% in 2019’s second 
quarter compared to 16.8% in 2018. In the first half of 2019, we achieved net 
income of $48.0 million, or $1.71 per diluted share, which included $0.6 
million ($0.01 per diluted share) of pre-tax acquisition-related charges as 
discussed above. This compares to net income of $46.0 million, or $1.56 per 
diluted share, in the first half of 2018, which included $3.9 million of 
pre-tax acquisition-related charges and a $1.7 million charge for acquisition 
and integration costs (collectively $0.14 per diluted share) as discussed 
above. Exclusive of these acquisition-related charges in both periods, our 
adjusted net income decreased to $48.4 million in the first half of 2019 
compared to $50.1 million in the prior year. Our effective tax rate was 25.8% 
in 2019’s the first half compared to 19.9% in 2018’s first half.

During the quarter ended June 30, 2019, we recorded record second quarter total 
revenue of $623.7 million, of which $597.9 million was from homes delivered, 
$11.5 million was from land sales and $14.3 million was from our financial 
services operations. Revenue from homes delivered increased 10% in 2019's 
second quarter compared to the same period in 2018 driven primarily by a 9% 
increase in the number of homes delivered (129 units) and a 1% increase in the 
average sales price of homes delivered ($2,000 per home delivered). Revenue 
from land sales increased $10.3 million from the second quarter of 2018 
primarily due to more land sales in our Southern region in 2019's second 
quarter compared to the prior year. Revenue from our financial services segment 
increased 20% to a second quarter record of $14.3 million in the second quarter 
of 2019 as a result of an increase in loans closed and sold in addition to 
improvement in margins on loans sold compared to 2018's second quarter. During 
the first half of 2019, we recorded record total revenue of $1.1 billion, of 
which $1.06 billion was from homes delivered, $14.5 million was from land sales 
and $26.1 million was from our financial services operations. Revenue from 
homes delivered increased 10% in 2019's first half compared to the same period 
in 2018 driven primarily by an 8% increase in the number of homes delivered 
(193 units) and a 3% increase in the average sales price of homes delivered 
($10,000 per home delivered). Revenue from land sales increased 8.9 million 
from 2018's first half primarily due to more land sales in our Southern region 
in 2019's first six months compared to the prior year. Revenue from our 
financial services segment decreased 3% to $26.1 million in the first half of 
2019 as a result of lower margins on loans sold during the period than we 
experienced in first half of 2018, primarily during the first quarter of 2019.

Total gross margin (total revenue less total land and housing costs) increased 
$11.1 million in the second quarter of 2019 compared to the second quarter of 
2018 as a result of an $8.7 million improvement in the gross margin of our 
homebuilding operations and a $2.4 million improvement 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) improved 
$8.4 million as a result of the 9% increase in the number of homes delivered 
and the 1% increase in the average sales price of homes delivered. Our housing 
gross margin percentage declined 20 basis points from 17.8% in prior year's 
second quarter to 17.6% in 2019's second quarter. Exclusive of the $0.1 million 
and $3.0 million of acquisition-related charges (as discussed above) taken in 
the second quarter of 2019 and 2018, respectively, our adjusted housing gross 
margin percentage declined 70 basis points from 18.3% in prior year's second 
quarter to 17.6% in 2019's second quarter, primarily as a result of the mix of 
homes delivered during 2019's second quarter compared to the same period in the 
prior year as well as higher lot costs when compared to the same period in 
2018. Our gross margin on land sales (land sale gross margin) improved $0.3 
million as a result of more third party land sales in the second quarter of 
2019 compared to the second quarter of 2018. The gross margin of our financial 
services operations increased $2.4 million in the second quarter compared to 
the second quarter of 2018 as a result of an increase in loans closed and sold 
in addition to improvement in margins on loans sold. Total gross margin 
increased $14.6 million in the first half of 2019 compared to the first half of 
2018 as a result of a $15.4 million improvement in the gross margin of our 
homebuilding operations, offset partially by a $0.8 million decline in the 
gross margin of our financial services operations. With respect to our 
homebuilding gross margin, our gross margin on homes delivered improved $15.4 
million as a result of the 8% increase in the number of homes delivered and the 
3% increase in the average sales price of homes delivered. Our housing gross 
margin percentage declined 20 basis points from 17.7% in prior year's first 
half to 17.5% in 2019's first six month period. Exclusive of the $0.6 million 
and $3.9 million of acquisition-related charges (as discussed above) taken in 
the first half of 2019 and 2018, respectively, our adjusted housing gross 
margin percentage declined 60 basis points from 18.1% in the prior year’s first 
half to 17.5% in 2019's first six months, primarily as a result of the mix of 
homes delivered during the first half of 2019 compared to the same period in 
the prior year as well as higher lot costs when compared to the same period in 
2018. Our gross margin on land sales remained flat in 2019's first six months 
compared to 2018's first six months. The gross margin of our financial services 
operations decreased $0.8 million in the first half of 2019 compared to the 
first half of 2018 as a result of a decline in margins on loans sold, offset in 
part by increases in the number of loan originations and the average loan 
amount.

We opened 42 new communities during the first half of 2019. We sell a variety 
of home types in various communities and markets, each of which yields a 
different gross margin. The timing of the openings of new replacement 
communities as well as underlying lot costs varies from year to year. As a 
result, our new contracts and housing gross margin may fluctuate up or down 
from quarter to quarter depending on the mix of communities delivering homes. 
For the three months ended June 30, 2019, selling, general and administrative 
expense increased $3.4 million, which partially offset the increase in our 
gross margin dollars discussed above, but declined as a percentage of revenue 
from 12.6% in the second quarter of 2018 to 11.8% in the second quarter of 
2019. Selling expense increased $1.9 million from 2018's second quarter but 
improved as a percentage of revenue to 6.0% in 2019's second quarter compared 
to 6.4% for the same period in 2018. Variable selling expense for sales 
commissions contributed $1.7 million to the increase due to the higher average 
sales price of homes delivered and the higher number of homes delivered in the 
quarter. The increase in selling expense was also attributable to a $0.2 
million increase in non-variable selling expense primarily related to costs 
associated with our sales offices and models as a result of our increased 
average community count. General and administrative expense increased $1.5 
million compared to the second quarter of 2018 but declined as a percentage of 
revenue from 6.2% in the second quarter of 2018 to 5.8% in the second quarter 
of 2019. The dollar increase in general and administrative expense was 
primarily due to a $1.0 million increase in land related expenses due to the 
increase in average community count and a $0.5 million increase in compensation 
related expenses due to our increased headcount. For the six months ended June 
30, 2019, selling, general and administrative expense increased $7.6 million, 
which partially offset the increase in our gross margin dollars discussed 
above, but declined as a percentage of revenue from 12.9% in the six months 
ended June 30, 2018 to 12.3% in the first six months of 2019. Selling expense 
increased $3.3 million from the first half of 2018 but improved as a percentage 
of revenue to 6.2% in 2019’s first six months compared to 6.6% for the same 
period in 2018. Variable selling expense for sales commissions contributed $2.6 
million to the increase due to the higher average sales price of homes 
delivered and the higher number of homes delivered year to date. The increase 
in selling expense was also attributable to a $0.7 million increase in 
non-variable selling expense primarily related to costs associated with our 
sales offices and models as a result of our increased average community count. 
General and administrative expense increased $4.3 million compared to the first 
half of 2018 but declined as a percentage of revenue from 6.3% in the first 
half of 2018 to 6.1% in the first half of 2019. The dollar increase in general 
and administrative expense was primarily due to a $1.8 million increase in land 
related expenses due to our higher average community count, a $1.5 million 
increase in compensation related expenses due to our increased headcount, a 
$0.6 million increase in costs associated with new information systems, and a 
$0.4 million increase related to employee severance benefits as a result of the 
wind down of our Washington, D.C. operations.

Outlook During the first half of 2019, mortgage interest rates moderated, which 
we believe provided a catalyst for improved consumer confidence and demand for 
new homes. We continue to believe that the basic underlying housing market 
fundamentals of low unemployment, higher wages and low inventory levels remain 
favorable.

We remain sensitive to changes in market conditions, with a continuing focus on 
increasing our profitability by generating additional revenue and improving 
overhead operating leverage, continuing to expand our market share, shifting 
our product mix to include more affordable designs, and investing in attractive 
land opportunities in order to increase our number of active communities. We 
expect to continue to emphasize the following strategic business objectives 
throughout the remainder of 2019:

•

profitably growing our presence in our existing markets, including opening new 
communities;

•

expanding the availability of our more affordable Smart Series homes;

•

opportunistically reviewing potential new markets;

•

maintaining a strong balance sheet; and

•

emphasizing customer service, product quality and design, and premier 
locations. Consistent with these objectives, we took a number of steps during 
the first six months of 2019 for continued improvement in our financial and 
operating results in 2019 and beyond, including investing $166.3 million in 
land acquisitions and $116.7 million in land development to help grow our 
presence in our existing markets. We currently estimate that we will spend 
approximately $550 million to $600 million on land purchases and land 
development in 2019, including the $283.0 million spent during the first six 
months of 2019. However, land transactions are subject to a number of factors, 
including our financial condition and market conditions, as well as 
satisfaction of various conditions related to specific properties. We will 
continue to monitor market conditions and our ongoing pace of home sales and 
deliveries, and we will adjust our land spending accordingly. We opened 42 
communities and closed 31 communities in the first half of 2019, ending the 
first six months of 2019 with a total of 220 communities compared to 209 
communities at June 30, 2018. Going forward, we believe our abilities to 
leverage our fixed costs, obtain land at desired rates of return, and open and 
grow our active communities provide our best opportunities for continuing to 
improve our financial results. However, we can provide no assurance that the 
positive trends reflected in our financial and operating metrics will continue 
in the future.


A home is included in “new contracts” when our standard sales contract is 
executed. “Homes delivered” represents homes for which the closing of the sale 
has occurred. “Backlog” represents homes for which the standard sales contract 
has been executed, but which are not included in homes delivered because 
closings for these homes have not yet occurred as of the end of the period 
specified. The composition of our homes delivered, new contracts, net and 
backlog is constantly changing and may be based on a dissimilar mix of 
communities between periods as new communities open and existing communities 
wind down. Further, home types and individual homes within a community can 
range significantly in price due to differing square footage, option 
selections, lot sizes and quality and location of lots. These variations may 
result in a lack of meaningful comparability between homes delivered, new 
contracts, net and backlog due to the changing mix between periods.

Cancellation Rates

Seasonality Typically, our homebuilding operations experience significant 
seasonality and quarter-to-quarter variability in homebuilding activity levels. 
In general, homes delivered increase substantially in the second half of the 
year compared to the first half of the year. We believe that this seasonality 
reflects the tendency of homebuyers to shop for a new home in the spring with 
the goal of closing in the fall or winter, as well as the scheduling of 
construction to accommodate seasonal weather conditions. Our financial services 
operations also experience seasonality because loan originations correspond 
with the delivery of homes in our homebuilding operations.


Non-GAAP Financial Measures This report contains information about our adjusted 
housing gross margin, adjusted income before income taxes and adjusted net 
income each of which constitutes a non-GAAP financial measure. Because adjusted 
housing gross margin, adjusted income before income taxes and adjusted net 
income are not calculated in accordance with GAAP, these financial measures may 
not be completely comparable to similarly-titled measures used by other 
companies in the homebuilding industry and, therefore, should not be considered 
in isolation or as an alternative to operating performance and/or financial 
measures prescribed by GAAP. Rather, these non-GAAP financial measures should 
be used to supplement our GAAP results in order to provide a greater 
understanding of the factors and trends affecting our operations.

Represents costs which include, but are not limited to, legal fees and 
expenses, travel and communication expenses, cost of appraisals, accounting 
fees and expenses, and miscellaneous expenses related to our acquisition of 
Pinnacle Homes. As these costs are not eligible for capitalization as initial 
direct costs, such amounts are expensed as incurred. We believe adjusted 
housing gross margin, adjusted income before income taxes and adjusted net 
income are each relevant and useful financial measures to investors in 
evaluating our operating performance as they measure the gross profit, income 
before income taxes and net income we generated specifically on our operations 
during a given period. These non-GAAP financial measures isolate the impact 
that the acquisition-related charges have on housing gross margins, and that 
the acquisition-related charges and acquisition and integration expenses have 
on income before income taxes and net income, and allow investors to make 
comparisons with our competitors that adjust housing gross margins, income 
before income taxes, and net income in a similar manner. We also believe 
investors will find these adjusted financial measures relevant and useful 
because they represent a profitability measure that may be compared to a prior 
period without regard to variability of the charges noted above. These 
financial measures assist us in making strategic decisions regarding community 
location and product mix, product pricing and construction pace. Year Over Year 
Comparison Three Months Ended June 30, 2019 Compared to Three Months Ended June 
30, 2018 The calculation of adjusted housing gross margin (referred to below), 
which we believe provides a clearer measure of the ongoing performance of our 
business, is described and reconciled to housing gross margin, the financial 
measure that is calculated using our GAAP results, below under “Segment 
Non-GAAP Financial Measures.”

Northern Region. During the three months ended June 30, 2019, homebuilding 
revenue in our Northern region increased $26.0 million, from $226.9 million in 
the second quarter of 2018 to $252.9 million in the second quarter of 2019. 
This 11% increase in homebuilding revenue was the result of an 11% increase in 
the number of homes delivered (60 units) and an increase in the average sales 
price of homes delivered ($3,000 per home delivered). Operating income in our 
Northern region increased $5.4 million from $19.0 million in the second quarter 
of 2018 to $24.4 million during the quarter ended June 30, 2019. This increase 
in operating income was the result of a $6.4 million improvement in our gross 
margin, offset partially by a $1.0 million increase in selling, general, and 
administrative expense. With respect to our homebuilding gross margin, our 
housing gross margin improved $6.5 million due to the increases in the number 
of homes delivered and average sales price of homes delivered noted above. Our 
housing gross margin percentage improved 90 basis points to 17.9% in the second 
quarter of 2019 from 17.0% in the prior year’s second quarter. Exclusive of the 
$0.1 million and $3.0 million of acquisition-related charges taken during the 
second quarter of 2019 and 2018, respectively, related to our acquisition of 
Pinnacle Homes in Detroit, Michigan on March 1, 2018, our adjusted housing 
gross margin for the second quarter of 2019 declined 50 basis points to 17.9% 
compared to 18.4% for the second quarter of 2018. The decline in housing gross 
margin percentage was primarily due to changes in product type and market mix 
of homes delivered as well as higher lot costs compared to 2018's same period. 
Our land sale gross margin declined $0.1 million due to fewer strategic land 
sales in the second quarter of 2019 compared to the same period in 2018. 
Selling, general and administrative expense increased $1.0 million, from $19.7 
million for the quarter ended June 30, 2018 to $20.7 million for the quarter 
ended June 30, 2019, and declined as a percentage of revenue to 8.2% in 2019's 
second quarter from 8.7% in 2018's second quarter. The increase in selling, 
general and administrative expense was attributable to a $0.4 million increase 
in selling expense, primarily due to an increase in variable selling expenses 
resulting from increases in sales commissions produced by the higher number of 
homes delivered and higher average sales price of homes delivered, and a $0.6 
million increase in general and administrative expense primarily related to an 
increase in land related expenses. During the three months ended June 30, 2019, 
we experienced a 7% increase in new contracts in our Northern region, from 656 
in the second quarter of 2018 to 703 in the second quarter of 2019. The 
increase in new contracts was partially due to improving demand in our newer 
communities compared to prior year and an increase in our average number of 
communities during the period. Homes in backlog, however, decreased 6% from 
1,330 homes at June 30, 2018 to 1,247 homes at June 30, 2019. Average sales 
price in backlog increased to $424,000 at June 30, 2019 compared to $420,000 at 
June 30, 2018 which was primarily due to changes in product type and market 
mix. During the three months ended June 30, 2019, we opened four new 
communities in our Northern region compared to four during 2018's second 
quarter. Our monthly absorption rate in our Northern region was 2.6 per 
community in the second quarter of 2019, the same as in 2018's second quarter. 
Southern Region. During the three month period ended June 30, 2019, 
homebuilding revenue in our Southern region increased $37.2 million, from 
$319.3 million in the second quarter of 2018 to $356.5 million in the second 
quarter of 2019. This 12% increase in homebuilding revenue was the result of an 
8% increase in the number of homes delivered (69 units) and a slight increase 
in the average sales price of homes delivered ($1,000 per home delivered). 
Operating income in our Southern region increased $1.7 million from $24.5 
million in the second quarter of 2018 to $26.2 million during the quarter ended 
June 30, 2019. This increase in operating income was the result of a $2.2 
million improvement in our gross margin, partially offset by a $0.5 million 
increase in selling, general, and administrative expense. With respect to our 
homebuilding gross margin, our housing gross margin improved $1.8 million, due 
primarily to the 8% increase in the number of homes delivered noted above. Our 
housing gross margin percentage declined from 18.3% in prior year’s second 
quarter to 17.4% in the second quarter of 2019, largely due to the mix of 
communities delivering homes and rising lot costs. Our land sale gross margin 
improved $0.4 million due to more strategic land sales in the second quarter of 
2019 compared to the second quarter of 2018. We did not record any additional 
warranty charges for stucco-related repair costs in our Florida communities 
during the second quarter of 2019. With respect to this matter, during the 
quarter ended June 30, 2019, we identified 28 additional homes in need of 
repair and completed repairs on 27 homes, and, at June 30, 2019, we have 165 
homes in various stages of repair. See Note 6 to our financial statements for 
further information. Selling, general and administrative expense increased $0.5 
million from $33.7 million in the second quarter of 2018 to $34.2 million in 
the second quarter of 2019 but declined as a percentage of revenue to 9.6% from 
10.6% in the second quarter of 2018. The increase in selling, general and 
administrative expense was attributable to a $1.6 million increase in selling 
expense primarily due to an increase in variable selling expenses resulting 
from increases in sales commissions produced by the higher number of homes 
delivered and higher average sales price of homes delivered. The increase in 
selling expense was partially offset by a $1.1 million decrease in general and 
administrative expense, which was primarily related to a $0.7 million decrease 
in professional fees and a $0.6 million decrease in incentive compensation 
expense offset, in part, by a $0.2 million increase in land abandonment 
charges. During the three months ended June 30, 2019, we experienced a 5% 
increase in new contracts in our Southern region, from 975 in the second 
quarter of 2018 to 1,028 in the second quarter of 2019. The increase in new 
contracts was primarily due to changes in product type and market mix and due 
to an increase in our average number of communities during the period. Homes in 
backlog decreased 2% from 1,636 homes at June 30, 2018 to 1,598 homes at June 
30, 2019. Average sales price in backlog decreased to $373,000 at June 30, 2019 
from $377,000 at June 30, 2018 due to changes in product type and market mix. 
During the three months ended June 30, 2019, we opened 20 communities in our 
Southern region compared to 12 during 2018's second quarter.


Our monthly absorption rate in our Southern region was 2.7 per community in the 
second quarter of 2019, the same as in the second quarter of 2018. Financial 
Services. Revenue from our mortgage and title operations increased $2.4 million 
to a second quarter record of $14.3 million in the second quarter of 2019 from 
$11.9 million in the second quarter of 2018 due to an increase in loans closed 
and sold in addition to improvement in margins on loans sold. We experienced a 
12% increase in the number of loan originations, from 930 in the second quarter 
of 2018 to 1,037 in the second quarter of 2019, and an increase in the average 
loan amount from $306,000 in the quarter ended June 30, 2018 to $308,000 in the 
quarter ended June 30, 2019. We experienced a $1.7 million increase in 
operating income in the second quarter of 2019 compared to 2018's second 
quarter, which was primarily due to the increase in revenue discussed above, 
offset partially by a $0.7 million increase in selling, general and 
administrative expense compared to the second quarter of 2018. This increase 
was primarily due to an increase in compensation expense related to our 
increase in employee headcount due to new mortgage and title locations as well 
as an increase in professional fees. At June 30, 2019, M/I Financial provided 
financing services in all of our markets. Approximately 79% of our homes 
delivered during the second quarter of 2019 were financed through M/I 
Financial, compared to 80% in the second quarter of 2018. Capture rate is 
influenced by financing availability and competition in the mortgage market, 
and can fluctuate from quarter to quarter. Corporate Selling, General and 
Administrative Expense. Corporate selling, general and administrative expense 
increased $1.2 million from $10.9 million for the second quarter of 2018 to 
$12.1 million for the second quarter of 2019. This increase primarily resulted 
from a $1.0 million increase in base compensation expense due to our increased 
headcount from our new mortgage and title offices in certain markets and a $0.2 
million increase in costs associated with new information systems. Equity in 
(Income) Loss from Joint Venture Arrangements. Earnings or loss from joint 
venture arrangements represent our portion of pre-tax earnings or loss from our 
joint ownership and development agreements, joint ventures and other similar 
arrangements. During the three months ended June 30, 2019, the Company earned 
$0.2 million in equity income from joint venture arrangements. During the three 
months ended June 30, 2018, the Company had less than $0.1 million in equity 
loss from joint venture arrangements. Interest Expense - Net. Interest expense 
for the Company increased $0.3 million from $4.9 million for the three months 
ended June 30, 2018 to $5.2 million for the three months ended June 30, 2019. 
This increase was primarily the result of an increase in average borrowings 
under our Credit Facility (as defined below) during the second quarter of 2019 
compared to prior year. Our weighted average borrowings increased from $789.8 
million in 2018's second quarter to $855.0 million in 2019's second quarter, 
and our weighted average borrowing rate increased from 6.18% in the second 
quarter of 2018 to 6.22% for second quarter of 2019. Income Taxes. Our overall 
effective tax rate was 26.6% for the three months ended June 30, 2019 and 16.8% 
for the same period in 2018. The increase in the effective rate from the three 
months ended June 30, 2018 was primarily attributable to a $3.0 million 
nonrecurring tax benefit taken during the quarter ended June 30, 2018 related 
to the retroactive reinstatement of energy efficient homes tax credits.

Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018

Northern Region. During the first half of 2019, homebuilding revenue in our 
Northern region increased $67.7 million, from $385.5 million in the first six 
months of 2018 to $453.2 million in the first six months of 2019. This 18% 
increase in homebuilding revenue was the result of an 13% increase in the 
number of homes delivered (123 units, which benefited from our new Detroit 
division) and a 4% increase in the average sales price of homes delivered 
($17,000 per home delivered) and a $0.7 million increase in land sale revenue. 
Operating income in our Northern region increased $9.8 million, from $31.2 
million during the first half of 2018 to $41.0 million during the six months 
ended June 30, 2019. The increase in operating income was primarily the result 
of a $13.3 million increase in our gross margin, offset, in part, by an $3.5 
million increase in selling, general, and administrative expense. With respect 
to our homebuilding gross margin, our housing gross margin improved $13.4 
million, due to the 13% increase in the number of homes delivered and the 4% 
increase in the average sales price of homes delivered noted above. Our housing 
gross margin percentage improved 40 basis points from 17.2% in the prior year's 
first half to 17.6% for the same period in 2019. Our housing gross margin for 
the first six months of 2019 and 2018 was unfavorably impacted by $0.6 million 
and $3.9 million of acquisition-related charges, respectively, from our recent 
Detroit acquisition. Exclusive of the $0.6 million and $3.9 million of 
acquisition-related charges, our adjusted housing gross margin percentage 
declined 50 basis points to 17.7% for the first half of 2019 from 18.2% 
primarily due to a change in product type and market mix of homes delivered 
compared to the prior year as well as increased lot costs. Our land sale gross 
margin declined $0.2 million as a result of fewer strategic land sales in the 
first half of 2019 compared to the same period in 2018. Selling, general and 
administrative expense increased $3.5 million, from $35.2 million for the six 
months ended June 30, 2018 to $38.7 million for the six months ended June 30, 
2019, but declined as a percentage of revenue to 8.5% compared to 9.1% for the 
same period in 2018. The increase in selling, general and administrative 
expense was attributable, in part, to a $2.1 million increase in selling 
expense due to (1) a $1.5 million increase in variable selling expenses 
resulting from increases in sales commissions produced by the higher average 
sales price of homes delivered and higher number of homes delivered, $0.6 
million of which was associated with our new Detroit division, and (2) a $0.7 
million increase in non-variable selling expenses primarily related to costs 
associated with our additional sales offices and models as a result of our 
increased community count, $0.4 million of which related to our new Detroit 
division. The increase in selling, general and administrative expense was also 
attributable to a $1.4 million increase in general and administrative expense, 
which was primarily related to an increase in land related expenses as well as 
incremental costs from our Detroit acquisition. During the six months ended 
June 30, 2019, we experienced a 4% increase in new contracts in our Northern 
region, from 1,354 in the six months ended June 30, 2018 to 1,405 in the first 
half of 2019 (which benefited from our new Detroit division). The increase in 
new contracts was due to improving demand in our newer communities compared to 
prior year and due to an increase in our average number of communities during 
the period. Homes in backlog decreased 6% from 1,330 homes at June 30, 2018 to 
1,247 homes at June 30, 2019. Average sales price in backlog increased to 
$424,000 at June 30, 2019 compared to $420,000 at June 30, 2018 which was 
primarily due to product type and market mix. During the six months ended June 
30, 2019, we opened eight new communities in our Northern region compared to 13 
during 2018's first half (excluding the 10 communities added as part of our 
acquisition in Detroit). Our monthly absorption rate in our Northern region 
declined to 2.6 per community in the first half of 2019 from 2.8 per community 
in the first half of 2018. Southern Region. During the six months ended June 
30, 2019, homebuilding revenue in our Southern region increased $42.0 million 
from $583.5 million in the first half of 2018 to $625.5 million in the first 
half of 2019. This 7% increase in homebuilding revenue was the result of a 4% 
increase in the number of homes delivered (70 units) and a 1% increase in the 
average sales price of homes delivered ($5,000 per home delivered), in addition 
to an $8.3 million increase in land sale revenue. Operating income in our 
Southern region increased $1.9 million from $41.9 million in the first half of 
2018 to $43.8 million during the six months ended June 30, 2019. This increase 
in operating income was the result of a $2.1 million improvement in our gross 
margin offset by a $0.2 million increase in selling, general, and 
administrative expense. With respect to our homebuilding gross margin, our 
gross margin on homes delivered improved $2.0 million, due primarily to the 4% 
increase in the number of homes delivered and the 1% increase in the average 
sales price of homes delivered. Our housing gross margin percentage declined 60 
basis points from 18.0% in prior year's first half to 17.4% in the same period 
in 2019, largely due to the mix of communities delivering homes and rising lot 
costs. Our land sale gross margin improved $0.1 million as a result of more 
strategic land sales in the first half of 2019 compared to the same period in 
2018. Selling, general and administrative expense increased $0.2 million from 
$62.7 million in the first half of 2018 to $62.9 million in the first half of 
2019 but declined as a percentage of revenue to 10.1% compared to 10.7% for the 
first half of 2018. The increase in selling, general and administrative expense 
was attributable to a $1.4 million increase in selling expense due to (1) a 
$1.2 million increase in variable selling expenses resulting from increases in 
sales commissions produced by the higher number of homes delivered and higher 
average sales price of homes delivered, and (2) a $0.2 million increase in 
non-variable selling expenses primarily related to costs associated with our 
sales offices and models as a result of our increased community count. The 
increase in selling expense was offset, in part, by a $1.2 million decrease in 
general and administrative expense, which was primarily related to a $0.8 
million decrease in professional fees and a $0.7 million decrease in incentive 
compensation expense, partially offset by a $0.3 million increase in land 
related expenses. During the six months ended June 30, 2019, we experienced a 
2% decrease in new contracts in our Southern region, from 2,016 in the six 
months ended June 30, 2018 to 1,970 in the first half of 2019, and a 2% 
decrease in backlog from 1,636 homes at June 30, 2018 to 1,598 homes at June 
30, 2019. The decreases in new contracts and backlog were primarily due to 
changes in product type and market mix. Average sales price in backlog 
decreased from $377,000 at June 30, 2018 to $373,000 at June 30, 2019 due to a 
change in product type and market mix. During the six months ended June 30, 
2019, we opened 34 communities in our Southern region compared to 25 during 
2018's first half. Our monthly absorption rate in our Southern region declined 
to 2.6 per community in the first half of 2019 from 2.8 per community in the 
first half of 2018. Financial Services. Revenue from our mortgage and title 
operations decreased $0.8 million (3%) from $26.9 million in the first half of 
2018 to $26.1 million in the first half of 2019 due to lower margins on loans 
sold due to increased competitive pressures primarily during the first quarter 
of 2019, partially offset by a 7% increase in the number of loan originations 
from 1,711 in the first half of 2018 to 1,835 in the first half of 2019 and an 
increase in the average loan amount from $304,000 in the six months ended June 
30, 2018 to $311,000 in the six months ended June 30, 2019.


We experienced a $2.1 million decrease in operating income in the first half of 
2019 compared to the first half of 2018, which was primarily due to a $1.3 
million increase in selling, general and administrative expense compared to 
2018's first half in addition to the decrease in our revenue discussed above. 
The increase in selling, general and administrative expense was primarily 
attributable to a $0.9 million increase in compensation expense related to our 
increase in employee headcount and a $0.4 million increase in professional 
fees. At June 30, 2019, M/I Financial provided financing services in all of our 
markets. Approximately 79% of our homes delivered during the first half of 2019 
were financed through M/I Financial, compared to 80% in 2018's first half. 
Capture rate is influenced by financing availability and can fluctuate from 
quarter to quarter. Corporate Selling, General and Administrative Expense. 
Corporate selling, general and administrative expense increased $2.6 million 
from $18.9 million for the six months ended June 30, 2018 to $21.5 million for 
the six months ended June 30, 2019. The increase was primarily due to a $1.5 
million increase in compensation expense, a $0.4 million increase related to 
benefits that will be provided to existing employees as a result of the orderly 
wind-down of our Washington, D.C. operations, a $0.3 million increase in 
depreciation costs associated with new information systems, and a $0.5 million 
increase in other miscellaneous expenses. Acquisition and Integration Costs. 
During the six months ended June 30, 2018, the Company incurred $1.7 million in 
acquisition and integration related costs related to our acquisition of 
Pinnacle Homes in Detroit, Michigan on March 1, 2018. These costs include, but 
are not limited to, legal fees and expenses, travel and communication expenses, 
cost of appraisals, accounting fees and expenses, and miscellaneous expenses. 
As these costs are not eligible for capitalization as initial direct costs 
under GAAP, such amounts are expensed as incurred. Income from Joint Venture 
Arrangements. Income from joint venture arrangements represent our portion of 
pre-tax earnings from our joint ownership and development agreements, joint 
ventures and other similar arrangements. During the six months ended June 30, 
2019 and 2018, the Company earned less than $0.1 million and $0.2 million in 
equity in income from joint venture arrangements, respectively. Interest 
Expense - Net. Interest expense for the Company increased $1.2 million from 
$10.8 million in the six months ended June 30, 2018 to $12.0 million in the six 
months ended June 30, 2019. This increase was primarily the result of an 
increase in average borrowings under our Credit Facility (as defined below) 
during the first half of 2019 compared to prior year, offset, in part, by the 
maturity of our 3.0% Convertible Senior Subordinated Notes due 2018 (the “2018 
Convertible Senior Subordinated Notes”) in March 2018, which were not 
outstanding at all during the first half of 2019 and had a lower interest rate 
than our borrowings under our Credit Facility. Our weighted average borrowings 
increased from $772.4 million in the first half of 2018 to $841.3 million in 
the first half of 2019, and our weighted average borrowing rate increased from 
6.20% in 2018's first half to 6.26% in 2019's first half. Income Taxes. Our 
overall effective tax rate was 25.8% for the six months ended June 30, 2019 and 
19.9% for the six months ended June 30, 2018. The increase in the effective 
rate for the six months ended June 30, 2019 was primarily attributable to a 
$3.0 million nonrecurring tax benefit taken during the quarter ended June 30, 
2018 related to the retroactive reinstatement of energy efficient homes tax 
credits.

Segment Non-GAAP Financial Measures. This report contains information about our 
adjusted housing gross margin, which constitutes a non-GAAP financial measure. 
Because adjusted housing gross margin is not calculated in accordance with 
GAAP, this financial measure may not be completely comparable to 
similarly-titled measures used by other companies in the homebuilding industry 
and, therefore, should not be considered in isolation or as an alternative to 
operating performance and/or financial measures prescribed by GAAP. Rather, 
this non-GAAP financial measure should be used to supplement our GAAP results 
in order to provide a greater understanding of the factors and trends affecting 
our operations. Adjusted housing gross margin for our Northern region is 
calculated as follows:


LIQUIDITY AND CAPITAL RESOURCES Overview of Capital Resources and Liquidity. At 
June 30, 2019, we had $20.4 million of cash, cash equivalents and restricted 
cash, with $19.4 million of this amount comprised of unrestricted cash and cash 
equivalents, which represents a $1.5 million decrease in unrestricted cash and 
cash equivalents from December 31, 2018. Our principal uses of cash for the six 
months ended June 30, 2019 were investment in land and land development, 
construction of homes, mortgage loan originations, investment in joint 
ventures, operating expenses, short-term working capital, debt service 
requirements, including the repayment of amounts outstanding under our credit 
facilities and the repurchase of $5.2 million of our outstanding common shares 
under our 2018 Share Repurchase Program (as defined below) during the first 
quarter of 2019. In order to fund these uses of cash, we used proceeds from 
home deliveries, the sale of mortgage loans and the sale of mortgage servicing 
rights, as well as excess cash balances, borrowings under our credit 
facilities, and other sources of liquidity. We are actively acquiring and 
developing lots in our markets to replenish and grow our lot supply and active 
community count. We expect to continue to expand our business based on the 
anticipated level of demand for new homes in our markets. Accordingly, we 
expect that our cash outlays for land purchases, land development, home 
construction and operating expenses will exceed our cash generated by 
operations during some periods during the remainder of 2019, and we expect to 
continue to utilize our Credit Facility (as defined below) during the remainder 
of 2019. During the first half of 2019, we delivered 2,724 homes, started 3,119 
homes, and spent $166.3 million on land purchases and $116.7 million on land 
development. Based upon our business activity levels, market conditions, and 
opportunities for land in our markets, we currently estimate that we will spend 
approximately $550 million to $600 million on land purchases and land 
development during 2019, including the $283.0 million spent during the first 
six months of 2019. We also continue to enter into land option agreements, 
taking into consideration current and projected market conditions, to secure 
land for the construction of homes in the future. Pursuant to such land option 
agreements, as of June 30, 2019, we had a total of 14,217 lots under contract, 
with an aggregate purchase price of approximately $574.1 million to be acquired 
during the remainder of 2019 through 2028. Land transactions are subject to a 
number of factors, including our financial condition and market conditions, as 
well as satisfaction of various conditions related to specific properties. We 
will continue to monitor market conditions and our ongoing pace of home 
deliveries and adjust our land spending accordingly. The planned increase in 
our land spending in 2019 compared to 2018 is driven primarily by the growth of 
our business. Operating Cash Flow Activities. During the six-month period ended 
June 30, 2019, we generated $10.6 million of cash from operating activities, 
compared to using $20.9 million of cash in operating activities during the 
first half of 2018. The cash generated from operating activities in the first 
half of 2019 was primarily a result of net income of $48.0 million, $44.7 
million of proceeds from the sale of mortgage loans net of mortgage loan 
originations, and an increase in accounts payable and customer deposits 
totaling $28.6 million, offset partially by an $89.9 million increase in 
inventory and a decrease in accrued compensation of $18.5 million. The $20.9 
million of cash used in operating activities in the first half of 2018 was 
primarily a result of a $137.7 million increase in inventory and a decrease in 
accrued compensation of $15.5 million, offset partially by net income of $46.0 
million, along with $64.9 million of proceeds from the sale of mortgage loans 
net of mortgage loan originations, an increase in accounts payable of $13.7 
million and an increase in customer deposits totaling $11.0 million.

Investing Cash Flow Activities. During the first half of 2019, we used $16.7 
million of cash in investing activities, compared to using $102.9 million of 
cash in investing activities during the first half of 2018. This decrease in 
cash used was primarily due to our acquisition of Pinnacle Homes, a privately 
held homebuilder in Detroit, Michigan, during the first quarter of 2018 for 
approximately $101.0 million (see Note 7 to our financial statements for more 
information), offset partially by proceeds from the sale of a portion of our 
mortgage servicing rights of $6.3 million in the first quarter of 2018 and an 
increase in our investment in joint venture arrangements during the first half 
of 2019 of $11.0 million.

Financing Cash Flow Activities. During the six months ended June 30, 2019, we 
generated $5.0 million of cash from financing activities, compared to 
generating $39.9 million of cash during the first six months of 2018. The $34.9 
million decrease in cash generated by financing activities was primarily due to 
a decrease in proceeds from borrowings (net of repayments) under our Credit 
Facility (as defined below) during the six months ended June 30, 2019 and the 
repurchase of $5.2 million of our common shares under our 2018 Share Repurchase 
Program (as defined below) during the first quarter of 2019, partially offset 
by the repayment during the first quarter of 2018 of that portion of our 3.0% 
Convertible Senior Subordinated Notes due 2018 (the “2018 Convertible Senior 
Subordinated Notes”) that were not converted into common shares by the holders 
thereof (approximately $65.9 million in aggregate principal amount), and a 
decrease in net repayments of borrowings under our two M/I Financial credit 
facilities. On August 14, 2018, the Company announced that its Board of 
Directors authorized a share repurchase program (the “2018 Repurchase Program”) 
pursuant to which the Company may purchase up to $50 million of its outstanding 
common shares (see Note 13 to our financial statements). During the first 
quarter of 2019, the Company repurchased 201,088 common shares with an 
aggregate purchase price of $5.2 million which was funded with cash on hand and 
borrowings under our Credit Facility. The Company did not make any additional 
repurchases during the quarter ended June 30, 2019. As of June 30, 2019, the 
Company is authorized to repurchase an additional $19.1 million of outstanding 
common shares under the 2018 Share Repurchase Program.

At June 30, 2019 and December 31, 2018, our ratio of homebuilding debt to 
capital was 45% and 44%, respectively, calculated as the carrying value of our 
outstanding homebuilding debt divided by the sum of the carrying value of our 
outstanding homebuilding debt plus shareholders’ equity. This increase was due 
to higher debt levels compared to December 31, 2018, offset partially by an 
increase in shareholders’ equity at June 30, 2019. We believe that this ratio 
provides useful information for understanding our financial position and the 
leverage employed in our operations, and for comparing us with other 
homebuilders. We fund our operations with cash flows from operating activities, 
including proceeds from home deliveries, land sales and the sale of mortgage 
loans. We believe that these sources of cash, along with our balance of 
unrestricted cash and borrowings available under our credit facilities, will be 
sufficient to fund our currently anticipated working capital needs, investment 
in land and land development, construction of homes, operating expenses, 
planned capital spending, and debt service requirements for at least the next 
twelve months. In addition, we routinely monitor current operational and debt 
service requirements, financial market conditions, and credit relationships and 
we may choose to seek additional capital by issuing new debt and/or equity 
securities to strengthen our liquidity or our long-term capital structure. The 
financing needs of our homebuilding and financial services operations depend on 
anticipated sales volume in the current year as well as future years, inventory 
levels and related turnover, forecasted land and lot purchases, debt maturity 
dates, and other factors. If we seek such additional capital, there can be no 
assurance that we would be able to obtain such additional capital on terms 
acceptable to us, if at all, and such additional equity or debt financing could 
dilute the interests of our existing shareholders and/or increase our interest 
costs. The Company is a party to three primary credit agreements: (1) a $500 
million unsecured revolving credit facility, dated July 18, 2013, as amended, 
with M/I Homes, Inc. as borrower and guaranteed by the Company’s wholly owned 
homebuilding subsidiaries (the “Credit Facility”); (2) a $125 million secured 
mortgage warehousing agreement (which increases to $160 million during certain 
periods), dated June 24, 2016, as amended, with M/I Financial as borrower (the 
“MIF Mortgage Warehousing Agreement”); and (3) a $50 million mortgage 
repurchase agreement (which increases to $65 million during certain periods), 
dated October 30, 2017, as amended, with M/I Financial as borrower (the “MIF 
Mortgage Repurchase Facility”).

The available amount under the Credit Facility is computed in accordance with 
the borrowing base calculation under the Credit Facility, which applies various 
advance rates for different categories of inventory and totaled $669.2 million 
of availability for additional senior debt at June 30, 2019. As a result, the 
full $500 million commitment amount of the facility was available, less any 
borrowings and letters of credit outstanding. There were $174.3 million of 
borrowings outstanding and $58.9 million of letters of credit outstanding at 
June 30, 2019, leaving $266.8 million available. The Credit Facility has an 
expiration date of July 18, 2021.

The available amount is computed in accordance with the borrowing base 
calculations under the MIF Mortgage Warehousing Agreement and the MIF Mortgage 
Repurchase Facility, each of which may be increased by pledging additional 
mortgage collateral. The maximum aggregate commitment amount of M/I Financial’s 
warehousing agreements as of June 30, 2019 was $175 million. The MIF Mortgage 
Warehousing Agreement has an expiration date of June 19, 2020 and the MIF 
Mortgage Repurchase Facility has an expiration date of October 28, 2019. Notes 
Payable - Homebuilding.

Homebuilding Credit Facility. The Credit Facility provides for an aggregate 
commitment amount of $500 million, including a $125 million sub-facility for 
letters of credit. The Credit Facility matures on July 18, 2021. Interest on 
amounts borrowed under the Credit Facility is payable at a rate which is 
adjusted daily and is equal to the sum of the one month LIBOR rate plus a 
margin of 250 basis points. The margin is subject to adjustment in subsequent 
quarterly periods based on the Company’s leverage ratio.

Borrowings under the Credit Facility constitute senior, unsecured indebtedness 
and availability is subject to, among other things, a borrowing base calculated 
using various advance rates for different categories of inventory. The Credit 
Facility contains various representations, warranties and covenants which 
require, among other things, that the Company maintain (1) a minimum level of 
Consolidated Tangible Net Worth of $551.2 million (subject to increase over 
time based on earnings and proceeds from equity offerings), (2) a leverage 
ratio not in excess of 60%, and (3) either a minimum Interest Coverage Ratio of 
1.5 to 1.0 or a minimum amount of available liquidity. In addition, the Credit 
Facility contains covenants that limit the Company’s number of unsold housing 
units and model homes, as well as the amount of Investments in Unrestricted 
Subsidiaries and Joint Ventures. 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 Note 12 
to our financial statements), subject to limitations on the aggregate amount 
invested in such Unrestricted Subsidiaries. The guarantors for the Credit 
Facility are the same subsidiaries that guarantee our $250.0 million aggregate 
principal amount of 5.625% Senior Notes due 2025 (the “2025 Senior Notes”) and 
our $300.0 million aggregate principal amount of 6.75% Senior Notes due 2021 
(the “2021 Senior Notes”). As of June 30, 2019, the Company was in compliance 
with all covenants of the Credit Facility, including financial covenants. The 
following table summarizes the most significant restrictive covenant thresholds 
under the Credit Facility and our compliance with such covenants as of June 30, 
2019:


Notes Payable - Financial Services.

MIF Mortgage Warehousing Agreement. The MIF Mortgage Warehousing Agreement is 
used to finance eligible residential mortgage loans originated by M/I 
Financial. The MIF Mortgage Warehousing Agreement provides a maximum borrowing 
availability of $125 million. In June 2019, the Company entered into an 
amendment to the MIF Mortgage Warehousing Agreement, which, among other things, 
extends the expiration date to June 19, 2020, and allows the maximum borrowing 
availability to be increased to $160 million from September 25, 2019 to October 
15, 2019 and also from November 15, 2019 to February 4, 2020 (periods of higher 
volume of mortgage originations). Interest on amounts borrowed under the MIF 
Mortgage Warehousing Agreement is payable at a per annum rate equal to the 
floating LIBOR rate plus a spread of 200 basis points. The MIF Mortgage 
Warehousing Agreement is secured by certain mortgage loans originated by M/I 
Financial that are being “warehoused” prior to their sale to investors. The MIF 
Mortgage Warehousing Agreement provides for limits with respect to certain loan 
types that can secure outstanding borrowings. There are currently no guarantors 
of the MIF Mortgage Warehousing Agreement. As of June 30, 2019, there was $78.2 
million outstanding under the MIF Mortgage Warehousing Agreement and M/I 
Financial was in compliance with all covenants thereunder. The financial 
covenants, as more fully described and defined in the MIF Mortgage Warehousing 
Agreement, are summarized in the following table, which also sets forth M/I 
Financial’s compliance with such covenants as of June 30, 2019:

Financial Covenant

Covenant Requirement


MIF Mortgage Repurchase Facility. The MIF Mortgage Repurchase Facility is used 
to finance eligible residential mortgage loans originated by M/I Financial and 
is structured as a mortgage repurchase facility. The MIF Mortgage Repurchase 
Facility provides for a maximum borrowing availability of $50 million, which 
increased to $65 million from November 15, 2018 through February 1, 2019 (a 
period of expected increases in the volume of mortgage originations). The MIF 
Mortgage Repurchase Facility expires on October 28, 2019. As is typical for 
similar credit facilities in the mortgage origination industry, at closing, the 
expiration of the MIF Mortgage Repurchase Facility was set at approximately one 
year and is under consideration for extension annually by the lender. We expect 
to extend the MIF Mortgage Repurchase Facility on or prior to the current 
expiration date of October 28, 2019, but we cannot provide any assurance that 
we will be able to obtain such an extension. M/I Financial pays interest on 
each advance under the MIF Mortgage Repurchase Facility at a per annum rate 
equal to the floating LIBOR rate plus 200 or 225 basis points depending on the 
loan type. The covenants in the MIF Mortgage Repurchase Facility are 
substantially similar to the covenants in the MIF Mortgage Warehousing 
Agreement. The MIF Mortgage Repurchase Facility provides for limits with 
respect to certain loan types that can secure outstanding borrowings, which are 
substantially similar to the restrictions in the MIF Mortgage Warehousing 
Agreement. There are no guarantors of the MIF Mortgage Repurchase Facility. As 
of June 30, 2019, there was $25.8 million outstanding under the MIF Mortgage 
Repurchase Facility. M/I Financial was in compliance with all financial 
covenants under the MIF Mortgage Repurchase Facility as of June 30, 2019. 
Senior Notes.

5.625% Senior Notes. In August 2017, the Company issued $250 million aggregate 
principal amount of 5.625% Senior Notes due 2025. The 2025 Senior Notes contain 
certain covenants, as more fully described and defined in the indenture 
governing the 2025 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 2025 Senior Notes. 
As of June 30, 2019, the Company was in compliance with all terms, conditions, 
and covenants under the indenture. See Note 8 to our financial statements for 
more information regarding the 2025 Senior Notes.

6.75% Senior Notes. In December 2015, the Company issued $300 million aggregate 
principal amount of 6.75% Senior Notes due 2021. The 2021 Senior Notes contain 
certain covenants, as more fully described and defined in the indenture 
governing the 2021 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 2021 Senior Notes. 
As of June 30, 2019, the Company was in compliance with all terms, conditions, 
and covenants under the indenture.


Weighted Average Borrowings. For the three months ended June 30, 2019 and 2018, 
our weighted average borrowings outstanding were $855.0 million and $789.8 
million, respectively, with a weighted average interest rate of 6.22% and 
6.18%, respectively. The increase in our weighted average borrowings related to 
increased borrowings under our Credit Facility during the second quarter of 
2019 compared to the same period in 2018.

At June 30, 2019, we had $174.3 million of borrowings outstanding under the 
Credit Facility, an increase from $117.4 million outstanding at December 31, 
2018. During the first half of 2019, the Company used the Credit Facility for 
investment in land and land development, construction of homes, operating 
expenses, working capital requirements and share repurchases under our 2018 
Share Repurchase Program. During the six months ended June 30, 2019, the 
average daily amount outstanding under the Credit Facility was $221.3 million 
and the maximum amount outstanding under the Credit Facility was $272.7 
million. Based on our currently anticipated spending on home construction, land 
acquisition and development in 2019, offset by expected cash receipts from home 
deliveries, we expect to continue to borrow under the Credit Facility during 
2019, with an estimated peak amount outstanding not expected to exceed $300 
million. The actual amount borrowed during 2019 (and the estimated peak amount 
outstanding) and related timing are subject to numerous factors, including the 
timing and amount of land and house construction expenditures, payroll and 
other general and administrative expenses, cash receipts from home deliveries, 
other cash receipts and payments, any capital markets transactions or other 
additional financings by the Company, any repayments or redemptions of 
outstanding debt, any additional share repurchases under the 2018 Share 
Repurchase Program and any other extraordinary events or transactions. The 
Company may experience significant variation in cash and Credit Facility 
balances from week to week due to the timing of such receipts and payments. 
There were $58.9 million of letters of credit issued and outstanding under the 
Credit Facility at June 30, 2019. During the six months ended June 30, 2019, 
the average daily amount of letters of credit outstanding under the Credit 
Facility was $58.5 million and the maximum amount of letters of credit 
outstanding under the Credit Facility was $61.8 million.

At June 30, 2019, M/I Financial had $78.2 million outstanding under the MIF 
Mortgage Warehousing Agreement. During the six months ended June 30, 2019, the 
average daily amount outstanding under the MIF Mortgage Warehousing Agreement 
was $42.4 million and the maximum amount outstanding was $113.0 million, which 
occurred during January, while the temporary increase provision was in effect 
and the maximum borrowing availability was $160.0 million.

At June 30, 2019, M/I Financial had $25.8 million outstanding under the MIF 
Mortgage Repurchase Facility. During the six months ended June 30, 2019, the 
average daily amount outstanding under the MIF Mortgage Repurchase Facility was 
$24.8 million and the maximum amount outstanding was $40.2 million, which 
occurred during January, while the temporary increase provision was in effect 
and the maximum borrowing availability was $65.0 million. Universal Shelf 
Registration. In June 2019, the Company filed a $400 million universal shelf 
registration statement with the SEC, which registration statement became 
effective upon filing and will expire in June 2022. Pursuant to the 
registration statement, the Company may, from time to time, offer debt 
securities, common shares, preferred shares, depositary shares, warrants to 
purchase debt securities, common shares, preferred shares, depositary shares or 
units of two or more of those securities, rights to purchase debt securities, 
common shares, preferred shares or depositary shares, stock purchase contracts 
and units. The timing and amount of offerings, if any, will depend on market 
and general business conditions.


CONTRACTUAL OBLIGATIONS

There have been no material changes to our contractual obligations appearing in 
the Contractual Obligations section of Management’s Discussion and Analysis of 
Financial Condition and Results of Operations included in our Annual Report on 
Form 10-K for the year ended December 31, 2018.

OFF-BALANCE SHEET ARRANGEMENTS Our off-balance sheet arrangements relating to 
our homebuilding operations include joint venture arrangements, land option 
agreements, guarantees and indemnifications associated with acquiring and 
developing land, and the issuance of letters of credit and completion bonds. 
Our use of these arrangements is for the purpose of securing the most desirable 
lots on which to build homes for our homebuyers in a manner that we believe 
reduces the overall risk to the Company. Additionally, in the ordinary course 
of its business, M/I Financial issues guarantees and indemnities relating to 
the sale of loans to third parties.

Land Option Agreements. In the ordinary course of business, the Company enters 
into land option or purchase agreements for which we generally pay 
non-refundable deposits. Pursuant to these land option agreements, the Company 
provides a deposit to the seller as consideration for the right to purchase 
land at different times in the future, usually at predetermined prices. In 
accordance with ASC 810, we analyze our land option or purchase agreements to 
determine whether the corresponding land sellers are VIEs and, if so, whether 
we are the primary beneficiary. Although we do not have legal title to the 
optioned land, ASC 810 requires a company to consolidate a VIE if the company 
is determined to be the primary beneficiary. In cases where we are the primary 
beneficiary, even though we do not have title to such land, we are required to 
consolidate these purchase/option agreements and reflect such assets and 
liabilities as Consolidated Inventory not Owned in our Unaudited Condensed 
Consolidated Balance Sheets. At both June 30, 2019 and December 31, 2018, we 
have concluded that we were not the primary beneficiary of any VIEs from which 
we are purchasing under land option or purchase agreements. In addition, we 
evaluate our land option or purchase agreements to determine for each contract 
if (1) a portion or all of the purchase price is a specific performance 
requirement, or (2) the amount of deposits and prepaid acquisition and 
development costs have exceeded certain thresholds relative to the remaining 
purchase price of the lots. If either is the case, then the remaining purchase 
price of the lots (or the specific performance amount, if applicable) is 
recorded as an asset and liability in Consolidated Inventory Not Owned on our 
Consolidated Balance Sheets. At June 30, 2019, “Consolidated Inventory Not 
Owned” was $13.1 million. At June 30, 2019, the corresponding liability of 
$13.1 million has been classified as Obligation for Consolidated Inventory Not 
Owned on our Unaudited Condensed Consolidated Balance Sheets.

Other than the Consolidated Inventory Not Owned balance, the Company currently 
believes that its maximum exposure as of June 30, 2019 related to our land 
option agreements is equal to the amount of the Company’s outstanding deposits 
and prepaid acquisition costs, which totaled $52.0 million, including cash 
deposits of $32.4 million, prepaid acquisition costs of $6.0 million, letters 
of credit of $9.6 million and $4.0 million of other non-cash deposits. Letters 
of Credit and Completion Bonds. The Company provides standby letters of credit 
and completion bonds for development work in progress, deposits on land and lot 
purchase agreements and miscellaneous deposits. As of June 30, 2019, the 
Company had outstanding $233.5 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 September 2026. Included in this total 
are: (1) $167.7 million of performance and maintenance bonds and $48.8 million 
of performance letters of credit that serve as completion bonds for land 
development work in progress; (2) $10.0 million of financial letters of credit; 
and (3) $7.0 million of financial bonds. The development agreements under which 
we are required to provide completion bonds or letters of credit are generally 
not subject to a required completion date and only require that the 
improvements are in place in phases as houses are built and sold. In locations 
where development has progressed, the amount of development work remaining to 
be completed is typically less than the remaining amount of bonds or letters of 
credit due to timing delays in obtaining release of the bonds or letters of 
credit. Guarantees and Indemnities. In the ordinary course of business, M/I 
Financial enters into agreements that guarantee purchasers of its mortgage 
loans that M/I Financial will repurchase a loan if certain conditions occur. 
The risks associated with these guarantees are offset by the value of the 
underlying assets, and the Company accrues its best estimate of the probable 
loss on these loans. Additionally, the Company has provided certain other 
guarantees and indemnities in connection with the acquisition and development 
of land by our homebuilding operations. See Note 5 to our Condensed 
Consolidated Financial Statements for additional details relating to our 
guarantees and indemnities.

INTEREST RATES AND INFLATION

Our business is significantly affected by general economic conditions within 
the United States and, particularly, by the impact of interest rates and 
inflation. Inflation can have a long-term impact on us because increasing costs 
of land, materials and labor can result in a need to increase the sales prices 
of homes. In addition, inflation is often accompanied by higher interest rates, 
which can have a negative impact on housing demand and the costs of financing 
land development activities and housing construction. Higher interest rates 
also may decrease our potential market by making it more difficult for 
homebuyers to qualify for mortgages or to obtain mortgages at interest rates 
that are acceptable to them. The impact of increased rates can be offset, in 
part, by offering variable rate loans with lower interest rates. In conjunction 
with our mortgage financing services, hedging methods are used to reduce our 
exposure to interest rate fluctuations between the commitment date of the loan 
and the time the loan closes. Rising interest rates, as well as increased 
materials and labor costs, may reduce gross margins. An increase in material 
and labor costs is particularly a problem during a period of declining home 
prices. Conversely, deflation can impact the value of real estate and make it 
difficult for us to recover our land costs. Therefore, either inflation or 
deflation could adversely impact our future results of operations.


QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our primary market risk results from fluctuations in interest rates. We are 
exposed to interest rate risk through borrowings under our revolving credit 
facilities, consisting of the Credit Facility, the MIF Mortgage Warehousing 
Agreement, and the MIF Mortgage Repurchase Facility which permitted borrowings 
of up to $675 million as of June 30, 2019, subject to availability constraints. 
Additionally, M/I Financial is exposed to interest rate risk associated with 
its mortgage loan origination services.

Interest Rate Lock Commitments: Interest rate lock commitments (“IRLCs”) are 
extended to certain homebuying customers who have applied for a mortgage loan 
and meet certain defined credit and underwriting criteria. Typically, the IRLCs 
will have a duration of less than six months; however, in certain markets, the 
duration could extend to nine months.

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.

Forward Sales of Mortgage-Backed Securities: Forward sales of mortgage-backed 
securities (“FMBSs”) are used to protect uncommitted IRLC loans against the 
risk of changes in interest rates between the lock date and the funding date. 
FMBSs related to uncommitted IRLCs are classified and accounted for as 
non-designated derivative instruments and are recorded at fair value, with 
gains and losses recorded in current earnings.

Mortgage Loans Held for Sale: Mortgage loans held for sale consist primarily of 
single-family residential loans collateralized by the underlying property. 
During the period between when a loan is closed and when it is sold to an 
investor, the interest rate risk is covered through the use of a whole loan 
contract or by FMBSs. The FMBSs are classified and accounted for as 
non-designated derivative instruments, with gains and losses recorded in 
current earnings.

Legal Proceedings

The Company and certain of its subsidiaries have received claims from 
homeowners in certain of our communities in our Tampa and Orlando, Florida 
markets (and been named as a defendant in legal proceedings initiated by 
certain of such homeowners) related to stucco on their homes. See Note 6 to the 
Company’s financial statements for further information regarding these stucco 
claims.

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 condition, 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.