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M/I Homes, Inc. -- Moody's upgrades M/I Homes' CFR to Ba3; outlook stable

·15 min read

Rating Action: Moody's upgrades M/I Homes' CFR to Ba3; outlook stable

Global Credit Research - 17 Dec 2020

Approximately $650 million of debt securities affected

New York, December 17, 2020 -- Moody's Investors Service (Moody's) upgraded M/I Homes, Inc.'s (M/I Homes) Corporate Family Rating to Ba3 from B1, Probability of Default Rating to Ba3-PD from B1-PD, and the ratings for the company's senior unsecured notes to Ba3 from B1. The SGL-2 Speculative Grade Liquidity Rating is maintained. The outlook is stable.

The rating upgrades reflect M/I Homes' increased revenue scale, improvement in its key credit metrics, including debt leverage, accomplished through solid growth in profitability and cash flow, and maintenance of the company's conservative financial policies. At September 30, 2020, M/I Homes' LTM revenue reached nearly $3 billion, with total debt to book capitalization standing at approximately 37.8% and homebuilding EBIT to interest coverage at 6.1x. In the next 12 to 18 months, Moody's does not anticipate the company to rely on its revolving credit facility as significantly as previously given the expectation of positive cash flow from operations as M/I Homes prudently invests in growth. This bodes well for its leverage profile. Moody's expects M/I Homes' total homebuilding debt to capitalization to be maintained below 45% and other credit metrics to be sustained or improve over the next year. Industry conditions are expected to be favorable in 2021, as reflected in Moody's positive outlook for the homebuilding sector, benefitting from low interest rates, low inventory of homes, and an increased importance of a home amid the pandemic.

The following rating actions were taken:

..Issuer: M/I Homes, Inc.

Upgrades:

.... Corporate Family Rating, Upgraded to Ba3 from B1

.... Probability of Default Rating, Upgraded to Ba3-PD from B1-PD

.... Senior Unsecured Regular Bond/Debenture, Upgraded to Ba3 (LGD4) from B1 (LGD4)

Outlook Actions: ....Outlook, Remains Stable RATINGS RATIONALE

M/I Homes' Ba3 Corporate Family Rating is supported by the company's: 1) strong market position in its key geographic markets and revenue scale of nearly $3 billion; 2) conservative financial strategies relating to homebuilding debt to capitalization, acquisitions and share repurchases; 3) prudent land strategy with over half of land supply in optioned lots; 4) focus on the first-time product that contributes about half of total sales; and 5) high proportion of sold homes in the balance of homes in construction, approximately 70% on average during the last twelve months.

At the same time, the rating is constrained by: 1) Moody's expectations that rising land, labor and building materials costs will weigh on gross margins over the next year; 2) the potential that cash flow from operations will be negative if investments in land and land development are accelerated; 3) risks of shareholder friendly activities, given M/I Homes' available share repurchase program, or acquisitions, although both are expected to be modest; and 4) cyclicality of the homebuilding sector and exposure to protracted declines during a market weakening.

The stable outlook reflects Moody's expectation that M/I Homes will maintain solid credit metrics, in line with its conservative financial and land strategy in the next 12 to 18 months, while benefiting from robust demand conditions in the homebuilding sector.

M/I Homes' SGL-2 Speculative Grade Liquidity Rating indicates Moody's expectation that the company will maintain a good liquidity profile over the next 12 to 15 months. Liquidity is supported by $203 million of cash at September 30, 2020, an expectation of modest positive cash from operations, ample available capacity under the company's $500 million unsecured revolving credit facility given that it is not expected to be significantly utilized, robust compliance cushion under financial covenants, and good sources of alternate liquidity given its land supply and an unsecured capital structure.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The ratings could be upgraded if:

» The company continues to demonstrate expansion in scale and improvement in geographic diversification

» Total homebuilding debt to book capitalization is sustained below 40% throughout the year

» Homebuilding interest coverage is sustained above 5.0x and gross margins exceed 20%

» Conservative financial policies and good liquidity, including solid cash flow, are maintained

The ratings could be downgraded if:

» Total homebuilding debt to book capitalization approaches 50% and interest coverage declines below 4.0x

» The company engages in aggressive shareholder friendly activities or large scale acquisitions

» Liquidity profile weakens

» End market conditions deteriorate leading to net losses and impairments

The principal methodology used in these ratings was Homebuilding And Property Development Industry published in January 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1108031. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Columbus, Ohio and formed in 1976, M/I Homes, Inc. sells homes under the M/I Homes and Showcase Collection (exclusively by M/I Homes) brands and the Hans Hagen brand in the Minneapolis/St. Paul, Minnesota 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; and Charlotte and Raleigh, North Carolina. In the LTM period ended September 30, 2020, the company generated approximately $2.8 billion in homebuilding revenue.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Natalia Gluschuk Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Dean Diaz Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653

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