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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2019
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission File Number 1-12434

M/I HOMES, INC.
(Exact name of registrant as specified in it charter)

 
Ohio
 
31-1210837
 
 
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 

3 Easton Oval, Suite 500, Columbus, Ohio 43219
(Address of principal executive offices) (Zip Code)

(614) 418-8000
(Registrant’s telephone number, including area code)

Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Shares, par value $.01
MHO
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
 
No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
 
No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
 
No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes
 
No




Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 
Large accelerated filer
 
Accelerated filer
 
 
Non-accelerated filer
 
Smaller reporting company
 
 
 
 
 
Emerging growth company
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. q

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
 
No

As of June 30, 2019, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant's common shares (its only class of common equity) held by non-affiliates (27,001,151 shares) was approximately $770.6 million.  The number of common shares of the registrant outstanding as of February 19, 2020 was 28,578,537.

DOCUMENT INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for the 2020 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, are incorporated by reference into Part III of this Annual Report on Form 10-K.






TABLE OF CONTENTS
 
 
 
PAGE
NUMBER
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2



PART I

Special Note of Caution Regarding Forward-Looking Statements
Certain information included in this report or in other materials we have filed or will file with the Securities and Exchange Commission (the “SEC”) (as well as information included in oral statements or other written statements made or to be made by us) contains or may contain forward-looking statements, including, but not limited to, statements regarding our future financial performance and financial condition.  Words such as “expects,” “anticipates,” “envisions,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of such words and similar expressions are intended to identify such forward-looking statements.  These statements involve a number of risks and uncertainties.  Any forward-looking statements that we make herein and in future reports and statements are not guarantees of future performance, and actual results may differ materially from those in such forward-looking statements as a result of various risk factors. See “Item 1A. Risk Factors” in Part I of this Annual Report on Form 10-K for more information regarding those risk factors.
Any forward-looking statement speaks only as of the date made. Except as required by applicable law, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in our subsequent reports on Forms 10-K, 10-Q and 8-K should be consulted.  This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995, and all of our forward-looking statements are expressly qualified in their entirety by the cautionary statements contained or referenced in this section.
Item 1. BUSINESS
General
M/I Homes, Inc. and subsidiaries (the “Company,” “we,” “us” or “our”) is one of the nation’s leading builders of single-family homes. The Company was incorporated, through predecessor entities, in 1973 and commenced homebuilding activities in 1976. Since that time, the Company has sold over 118,200 homes.
The Company consists of two distinct operations: homebuilding and financial services. Our homebuilding operations are aggregated for reporting purposes into two reporting segments - the Northern and Southern regions. Our financial services operations support our homebuilding operations by providing mortgage loans and title services to the customers of our homebuilding operations and are reported as an independent segment.
Our homebuilding operations comprise the most significant portion of our business, representing 98% of consolidated revenue in both 2019 and 2018. We design, market, construct and sell single-family homes and attached townhomes to first-time, move-up, empty-nester, and luxury buyers. In addition to home sales, our homebuilding operations generate revenue from the sale of land and lots. We use the term “home” to refer to a single-family residence, whether it is a single-family home or attached home, and we use the term “community” to refer to a single development with a unique product type, or, at times, “communities” to refer to a single development with multiple product types, in which we construct homes. We primarily construct homes in planned development communities and mixed-use communities. We are currently offering homes for sale in 225 communities within 15 markets located in ten states. Our average sales price of homes delivered during 2019 was $384,000, and the average sales price of our homes in backlog at December 31, 2019 was $396,000. We offer homes ranging from a base sales price of approximately $180,000 to $1,000,000 and believe that this range of price points allows us to appeal to and attract a wide range of buyers. We believe that we distinguish ourselves from competitors by offering homes in select areas with a high level of design and construction quality, providing superior customer service and offering mortgage and title services in order to fully serve our customers. In our experience, our product offerings and customer service make the homebuying process more efficient for our customers.
Our financial services operations generate revenue primarily from originating and selling mortgages and collecting fees for title insurance and closing services. We offer mortgage banking services to our homebuyers through our 100%-owned subsidiary, M/I Financial, LLC (“M/I Financial”). We offer title services through subsidiaries that are either 100% or majority owned by the Company. Our financial services operations accounted for 2% of our consolidated revenues in both 2019 and 2018. See the “Financial Services” section below for additional information regarding our financial services operations.
Our principal executive offices are located at 3 Easton Oval, Suite 500, Columbus, Ohio 43219. The telephone number of our corporate headquarters is (614) 418-8000 and our website address is www.mihomes.com. Information on our website is not a part of and shall not be deemed incorporated by reference in this Form 10-K.

3



Markets
For reporting purposes, our 15 homebuilding divisions are aggregated into the following two segments:
Region
Market/Division
Year Operations Commenced
Northern
Columbus, Ohio
1976
Northern
Cincinnati, Ohio
1988
Northern
Indianapolis, Indiana
1988
Northern
Chicago, Illinois
2007
Northern
Minneapolis/St. Paul, Minnesota
2015
Northern
Detroit, Michigan
2018
Southern
Tampa, Florida
1981
Southern
Orlando, Florida
1984
Southern
Sarasota, Florida
2016
Southern
Houston, Texas
2010
Southern
San Antonio, Texas
2011
Southern
Austin, Texas
2012
Southern
Dallas/Fort Worth, Texas
2013
Southern
Charlotte, North Carolina
1985
Southern
Raleigh, North Carolina
1986

During the first quarter of 2019, we decided to wind down our Washington, D.C. operations, which was substantially completed as of December 31, 2019.
We believe we have experienced management teams in each of our divisions with local market expertise. Our business requires in-depth knowledge of local markets to acquire land in desirable locations and on favorable terms, engage subcontractors, plan communities that meet local demand, anticipate consumer tastes in specific markets, and assess local regulatory environments. Although we centralize certain functions (such as accounting, human resources, legal, land purchase approval, and risk management) to benefit from economies of scale, our local management, generally under the direction of an Area President and supervised by a Region President, exercises considerable autonomy in identifying land acquisition opportunities, developing and implementing product and sales strategies, and controlling costs.
Industry Overview and Current Market Conditions
Housing market conditions were generally favorable during 2019, as evidenced by our strong results. We believe that many of the fundamentals supporting continued growth in demand remain favorable, including low mortgage rates, high consumer confidence, growth in employment, wage increases, and a limited supply of new and existing homes. Company-wide, our absorption pace of sales per community for 2019 improved to 2.6 per month compared to 2.4 per month in 2018. However, as a result of the growth in our more affordable Smart Series, primarily designed for entry-level and move-down homebuyers, our average sales price in backlog declined in 2019 by 3%.
Business Strategy
We remain focused on increasing our profitability by generating additional revenue, continuing to expand our market share, shifting our product mix to include more affordable designs, and investing in attractive land opportunities to increase our number of active communities. Consistent with our focus on improving long-term financial results, we expect to emphasize the following strategic business objectives in 2020:
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.
However, we can provide no assurance that the positive trends reflected in our financial and operating metrics in 2018 and 2019 will continue in 2020.

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Sales and Marketing
During 2019, we continued to focus our marketing efforts on first-time and move-up homebuyers, including home designs targeted to first-time, millennial and empty-nester homebuyers. We market and sell our homes primarily under the M/I Homes and Showcase Collection (exclusively by M/I Homes) brands. Additionally, the Hans Hagen brand is used in older communities in our Minneapolis/St. Paul market. Our marketing efforts are directed at driving interest in and preference for the M/I Homes brands over other homebuilders or the resale market.
We provide our homebuyers with the following products, programs and services which we believe differentiate our brand: (1) homes with high quality construction located in attractive areas and desirable communities that are supported by our industry leading transferable structural warranty, which is a 15-year warranty in all of our markets other than Texas and a 10-year warranty in our Texas markets; (2) our Whole Home Building Standards which are designed to deliver features and benefits that satisfy the buyer’s expectation for a better-built home, including a more eco-friendly and energy efficient home that we believe will generally save our customers up to 30% on their energy costs compared to a home that is built to minimum code requirements; (3) our Design Studios and Design Consultants that assist our homebuyers in selecting product and design options; (4) fully furnished model homes and highly-trained sales consultants to build the buyer’s confidence and enhance the quality of the homebuying experience; (5) our mortgage financing programs that we offer through M/I Financial, including competitive fixed-rate and adjustable-rate loans; (6) our Ready Now Homes program which offers homebuyers the opportunity to close on certain new homes in 60 days or less; and (7) our unwavering focus on customer care and customer satisfaction.
By offering Whole Home Energy-Efficient Homes to our customers, we enable our homebuyers to save on their energy costs (the second largest cost of home ownership) compared to a home that is built to minimum code requirements. We use independent RESNET-Certified Raters and the HERS (Home Energy Rating System) Index, the national standard for energy efficiency, to measure the performance of our homes, including insulation, ventilation, air tightness, and the heating and cooling system. Our divisions’ average scores are generally lower (and, therefore, better) than the Environmental Protection Agency’s Energy Star target standard of 72-75 or the average score for a resale home (130 or higher).
To further enhance the homebuying process, we operate Design Studios in a majority of our markets. Our Design Studios allow our homebuyers to select from a variety of product and design options that are available for purchase as part of the original construction of their homes. Our centers are staffed with Design Consultants who help our homebuyers select the right combination of options to meet their budget, lifestyle and design sensibilities. In most of our markets, we offer our homebuyers the option to consider and make design planning decisions using our Envision online design tool. We believe this tool is helpful for prospective buyers to use during the planning phase and makes their actual visit to our Design Studios more productive and efficient as our consultants are able to view the buyer’s preliminary design selections and pull samples in advance of the buyer’s visit.
We also invest in designing and decorating fully-furnished and distinctive model homes intended to create an atmosphere reflecting how people live today and help our customers imagine the possibilities for a “home of their own, just the way they dreamed it.” We carefully select the interior decorating and design of our model homes to reflect the lifestyles of our prospective buyers. We believe these models showcase our homes at their maximum livability and potential and provide ideas and inspiration for our customers to incorporate valuable design options into their new home.
Our company-employed sales consultants are trained and prepared to meet the buyer’s expectations and build the buyer’s confidence by fully explaining the features and benefits of our homes, helping each buyer determine which home best suits the buyer’s needs, explaining the construction process, and assisting the buyer in choosing the best financing option. Significant attention is given to the ongoing training of all sales personnel to assure a high level of professionalism and product knowledge. As of December 31, 2019, we employed 248 home sales consultants.
We also offer specialized mortgage financing programs through M/I Financial to assist our homebuyers. We offer conventional financing options along with programs offered by the Federal Housing Authority (“FHA”), U.S. Veterans Administration (“VA”), United States Department of Agriculture (“USDA”) and state housing bond agencies. M/I Financial offers our homebuyers “one-stop” shopping by providing mortgage and title services for the purchase of their home, which we believe saves our customers both time and money. By working with many of the major mortgage providers in the country, we seek to offer our homebuyers unique programs with below-market financing options that are more competitive than what homebuyers could obtain on their own. With respect to title services, the Company’s title subsidiaries work closely with our homebuilding divisions so that we are able to provide an organized and efficient home delivery process.
We also build inventory homes in most of our communities to offer homebuyers the opportunity to close on certain new homes in 60 days or less. These homes enhance our marketing and sales efforts to prospective homebuyers who require a home delivery within a short time frame and allow us to compete effectively with existing homes available in the market. We determine our inventory homes strategy in each market based on local market factors, such as job growth, the number of job relocations, housing

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demand and supply, seasonality and our past experience in the market. We maintain a level of inventory homes in each community based on our current and planned sales pace, and we monitor and adjust inventory homes on an ongoing basis as conditions warrant.
We seek to keep our homebuyers actively involved in the construction of their new home, providing them with continued communication throughout the design and construction process. Our goal is to put the buyer first and enhance the total homebuying experience. We believe prompt and courteous responses to homebuyers’ needs throughout the homebuying process reduce post-delivery repair costs, enhance our reputation for quality and service, and encourage repeat and referral business from homebuyers and the real estate community.
Finally, we believe our ultimate differentiator comes from the principles our company was founded upon -- integrity and delivering superior customer service and a quality product. Our customer satisfaction scores are measured by an independent third-party company at both 30 days and 6 months after delivery to hold us accountable for building a home of the highest quality.
We market our homes using digital and traditional media. The particular media used differs from market to market based on area demographics and other competitive factors. We market directly to consumers via newspaper, direct mail, billboards, radio, and television as well as internet marketing using our website, search engine optimization, paid search, and display advertising. We leverage our presence on referral sites, such as Zillow.com and NewHomeSource.com, to drive sales leads to our internet sales associates.  We also use email marketing to maintain communication with existing prospects and customers. We use our social media presence to communicate to potential homebuyers the experiences of customers who have purchased our homes and to provide content about our homes and design features.
Product Lines, Design and Construction
Our residential communities are generally located in suburban areas that are easily accessible through public and personal transportation. Our communities are designed as neighborhoods that fit existing land characteristics. We strive to achieve diversity among architectural styles within a community by offering a variety of house models and several exterior design options for each model. We also preserve existing trees and foliage whenever practicable. Normally, homes of the same type or color may not be built next to each other. We believe our communities have attractive entrances with distinctive signage and landscaping and that our attention to community detail avoids a “development” appearance and gives each community a diversified neighborhood appearance.
We offer homes ranging from a base sales price of approximately $180,000 to $1,000,000 and from approximately 1,100 to 5,500 square feet. In addition to single-family detached homes, we also offer attached townhomes in several of our markets. By offering a wide range of homes, we are able to attract first-time, millennial, move-up, empty-nester and luxury homebuyers. It is our goal to sell more than one home to our buyers, and we believe we have had success in this strategy.
We devote significant resources to the research, design and development of our homes to meet the demands of our buyers and evolving market requirements. Across all of our divisions, we currently offer over 600 different floor plans designed to reflect current lifestyles and design trends. We continue to change and update our plan portfolio based on trends and market conditions. In addition, we are continuing to develop new floor plans and communities specifically for the growing empty-nester market. These plans (primarily ranch and main floor master bedroom type plans) focus on move-down buyers, are smaller in size, and feature outdoor living potential, fewer bedrooms, and better community amenities. Our homebuilding divisions often share successful plans with other divisions, when appropriate.
We have successfully implemented our “Smart Series” across all of our divisions and it represented approximately 30% of our total sales as of December 31, 2019. Our “Smart Series” is intended to offer buyers excellent value, great locations, and pre-selected packages of upgraded finishes and appliances. Our “Smart Series” targets entry-level and move-down buyers and focuses significant attention on affordability, livability and offering some design flexibility to our customers. This series has become an important and successful part of our overall product lineup.
Our “City Collection” floor plans offer a unique and upscale urban lifestyle by utilizing narrow lots, detached rear garages and thoughtfully designed interiors. Our City Collection enables us to participate in new infill development opportunities that extend beyond our traditional suburban markets.
We design all of our product lines to reduce production costs and construction cycle times while adhering to our quality standards and using materials and construction techniques that reflect our commitment to more environmentally conscious homebuilding methods. All of our homes are constructed according to proprietary designs that meet the applicable FHA and VA requirements and all local building codes. We attempt to maintain efficient operations by utilizing standardized materials. Our raw materials consist primarily of lumber, concrete and similar construction materials, and while these materials are generally available from a variety of sources, we have reduced construction and administrative costs by executing national purchasing contracts with select

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vendors. Our homes are constructed according to standardized prototypes which are designed and engineered to provide innovative product design while attempting to minimize costs of construction and control product consistency and availability. We generally employ subcontractors for the installation of site improvements and the construction of homes. The construction of each home is supervised by a Personal Construction Supervisor who reports to a Production Manager, both of whom are employees of the Company. Our Personal Construction Supervisors manage the scheduling and construction process. Subcontractor work is performed pursuant to written agreements that require our subcontractors to comply with all applicable laws and labor practices, follow local building codes and permits, and meet performance, warranty, and insurance requirements. The agreements generally specify a fixed price for labor and materials and are structured to provide price protection for a majority of the higher-cost phases of construction for homes in our backlog.
We begin construction on a majority of our homes after we have obtained a sales contract and preliminary oral confirmation from the buyer’s lender that financing should be approved. In certain markets, contracts may be accepted contingent upon the sale of an existing home, and construction may be authorized through a certain phase prior to satisfaction of that contingency. The construction of our homes typically takes approximately four to six months from the start of construction to completion of the home, depending on the size and complexity of the particular home being built, weather conditions, and the availability of labor, materials, and supplies. We also construct inventory homes (i.e., homes started in the absence of an executed contract) to facilitate delivery of homes on an immediate-need basis under our Ready Now Homes program and to provide presentation of new products. For some prospective buyers, selling their existing home has become a less predictable process and, as a result, when they sell their home, they often need to find, buy and move into a new home in 60 days or less. Other buyers simply prefer the certainty provided by being able to fully visualize a home before purchasing it. Of the total number of homes closed in 2019 and 2018, 49% and 45%, respectively, were inventory homes which include both homes started as inventory homes and homes that started under a contract that were later cancelled and became inventory homes as a result.
Backlog
We sell our homes under standard purchase contracts, which generally require a homebuyer deposit at the time of signing the contract. The amount of the deposit varies among markets and communities. We also generally require homebuyers to pay additional deposits when they select options or upgrades for their homes. Most of our home purchase contracts stipulate that if a homebuyer cancels a contract with us, we have the right to retain the homebuyer’s deposits. However, we generally permit our homebuyers to cancel their obligations and obtain refunds of all or a portion of their deposits (unless home construction has started) in the event mortgage financing cannot be obtained within the period specified in their contract to maintain goodwill with the potential buyer.
Backlog consists of homes that are under contract but have not yet been delivered. Ending backlog represents the number of homes in backlog from the previous period plus the number of net new contracts (new contracts for homes less cancellations) generated during the current period minus the number of homes delivered during the current period. The backlog at any given time will be affected by cancellations. Due to the seasonality of the homebuilding industry, the number of homes delivered has historically increased from the first to the fourth quarter in any year.
As of December 31, 2019, we had a total of 2,671 homes in backlog with an aggregate sales value of $1,058 million, in various stages of completion, including homes that are under contract but for which construction had not yet begun. As of December 31, 2018, we had a total of 2,194 homes in backlog, with an aggregate sales value of $896.7 million . Homes included in year-end backlog are typically included in homes delivered in the subsequent year.
Warranty
We provide certain warranties in connection with our homes and also perform inspections with the buyer of each home immediately prior to delivery and as needed after a home is delivered. The Company offers both a transferable limited warranty program (“Home Builder’s Limited Warranty”) and a transferable structural limited warranty. The Home Builder’s Limited Warranty covers construction defects for a statutory period based on geographic market and state law (currently ranging from five to ten years for the states in which the Company operates) and includes a mandatory arbitration clause. The structural warranty is for 10 or 15 years for homes sold after December 1, 2015 and 10 or 30 years for homes sold after April 25, 1998 and on or before December 1, 2015. We also pass along to our homebuyers all warranties provided by the manufacturers or suppliers of components installed in each home. Although our subcontractors are generally required to repair and replace any product or labor defects during their respective warranty periods, we are ultimately responsible to the homeowner for making such repairs during our applicable warranty period. Accordingly, we have estimated and established reserves for both our Home Builder’s Limited Warranty and potential future structural warranty costs based on the number of home deliveries and historical data trends for our communities. In the case of the structural warranty, we also employ an actuary to assist in the determination of our future costs on an annual basis. Our warranty expense (excluding stucco-related repair costs in certain of our Florida communities in 2018 and 2017 (as more fully

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discussed in Note 8 to our Consolidated Financial Statements)) was approximately 0.7% of total housing revenue in 2019 and 0.8% of total housing revenue in each of 2018 and 2017.
Land Acquisition and Development
We continuously evaluate land acquisition opportunities in the normal course of our homebuilding business, and we focus on both replenishing our lot positions and adding to our lot positions in key submarkets to expand our market share. Our goal is to maintain an approximate three to five-year supply of lots, including lots controlled under option contracts and purchase agreements, which we believe provides an appropriate horizon for addressing regulatory matters and land development and the subsequent build-out of the homes in each community, and allows us to manage our business plan for future home deliveries.
We seek to meet our need for lots by obtaining advantageous land positions in desirable locations in a cost effective manner that is responsive to market conditions and maintains our financial strength and liquidity. Before acquiring land, we complete extensive comparative studies and analyses, which assist us in evaluating the economic feasibility of each land acquisition. We consider a number of factors, including projected rates of return, estimated gross margins, and projected pace of absorption and sales prices of the homes to be built, all of which are impacted by our evaluation of population and employment growth patterns, demographic trends and competing new home subdivisions and resales in the relevant sub-market.
We attempt to acquire land with a minimum cash investment and negotiate takedown options when available from sellers. We also restrict the use of guarantees or commitments in our land contracts to limit our financial exposure to the amounts invested in the property and pre-development costs during the life of the community we are developing. We believe this approach significantly reduces our risk. In addition, we generally obtain necessary development approvals before we acquire land. We acquire land primarily through contingent purchase agreements, which typically condition our obligation to purchase land upon approval of zoning and utilities, as well as our evaluation of soil and subsurface conditions, environmental and wetland conditions, market analysis, development costs, title matters and other property-related criteria. All land and lot purchase agreements and the funding of land purchases require the approval of our corporate land acquisition committee, which is comprised of our senior management team and key operating and financial executives. Further details relating to our land option agreements are included in Note 8 to our Consolidated Financial Statements.
In 2019, we continued to increase our investments in land acquisition, land development and housing inventory to meet demand and expand our operations in certain markets. In 2019 and 2018, we developed over 81% and 74%, respectively, of our lots internally, primarily due to a lack of availability of developed lots in desirable locations in the market. Raw land that requires development generally remains more available. In order to minimize our investment and risk of large exposure in a single location, we have periodically partnered with other land developers or homebuilders to share in the cost of land investment and development through joint ownership and development agreements, joint ventures, and other similar arrangements. For joint venture arrangements where a special purpose entity is established to own the property, we enter into limited liability company or similar arrangements (“LLCs”) with the other partners. Further details relating to our joint venture arrangements are included in Note 6 to our Consolidated Financial Statements.
During the development of lots, we are required by some municipalities and other governmental authorities to provide completion bonds or letters of credit for sewer, streets and other improvements. 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 homes 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.
Our ability to continue development activities over the long-term will depend upon, among other things, a suitable economic environment and our continued ability to locate suitable parcels of land, enter into options or agreements to purchase such land, obtain governmental approvals for such land, and consummate the acquisition and development of such land.

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In the normal course of our homebuilding business, we balance the economic risk of owning lots and land with the necessity of having lots available for construction of our homes. The following table sets forth our land position in lots (including lots held in joint venture arrangements) at December 31, 2019:
 
Lots Owned
 
 
Region
Developed Lots
Lots Under Development
Undeveloped Lots (a)
Total Lots Owned
Lots Under Contract
Total
Northern
3,415

508

2,934

6,857

6,207

13,064

Southern
2,805

1,877

3,127

7,809

12,386

20,195

Total
6,220

2,385

6,061

14,666

18,593

33,259

(a)
Includes our interest in raw land held by joint venture arrangements expected to be developed into 917 lots.
Financial Services
We sell our homes to customers who generally finance their purchases through mortgages. M/I Financial provides our customers with competitive financing and coordinates and expedites the loan origination transaction through the steps of loan application, loan approval, and closing and title services. M/I Financial provides financing services in all of our housing markets. We believe that our ability to offer financing to customers on competitive terms as a part of the sales process is an important factor in completing sales.
M/I Financial has been approved by the U.S. Department of Housing and Urban Development, FHA, VA and USDA to originate mortgages that are insured and/or guaranteed by these entities. In addition, M/I Financial has been approved by the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and the Federal National Mortgage Association (“Fannie Mae”) as a seller and servicer of mortgages and as a Government National Mortgage Association (“Ginnie Mae”) issuer. Our agency approvals, along with a sub-servicing relationship, allow us to sell loans on either a servicing released or servicing retained basis. This option provides flexibility and additional financing options to our customers.
We also provide title and closing services to purchasers of our homes through our 100%-owned subsidiaries, TransOhio Residential Title Agency Ltd., M/I Title Agency Ltd., and M/I Title LLC. Through these entities, we serve as a title insurance agent by providing title insurance policies and examination and closing services to purchasers of our homes in the Columbus, Cincinnati, Minneapolis/St. Paul, Tampa, Orlando, Sarasota, San Antonio, Houston, Dallas/Fort Worth, and Austin markets.  In addition, TransOhio Residential Title Agency Ltd. provides examination and title insurance services to our housing markets in the Raleigh, Charlotte, Chicago and Indianapolis markets. We assume no underwriting risk associated with the title policies.
Corporate Operations
Our corporate operations and home office are located in Columbus, Ohio, where we perform the following functions at a centralized level:
establish strategy, goals and operating policies;
ensure brand integrity and consistency across all local and regional communications;
monitor and manage the performance of our operations;
allocate capital resources;
provide financing and perform all cash management functions for the Company, and maintain our relationship with lenders;
maintain centralized information and communication systems; and
maintain centralized financial reporting, internal audit functions, and risk management.
Competition
The homebuilding industry is fragmented and highly competitive. We operate as a top ten builder in the majority of our markets. We compete with numerous national, regional, and local homebuilders in each of the geographic areas in which we operate. Our competition ranges from small local builders to larger regional builders to publicly-owned builders and developers, some of which have greater financial, marketing, land acquisition, and sales resources than us. Previously owned homes and the availability of rental housing provide additional competition. We compete primarily on the basis of price, location, design, quality, service, and reputation. Our financial services operations compete with other mortgage lenders to arrange financings for homebuyers. Principal competitive factors include interest rates and other features of mortgage loan products available to the consumer.

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Government Regulation and Environmental Matters
Our homebuilding and financial services operations are subject to compliance with numerous laws and regulations. Our homebuilding operations are subject to various local, state and federal statutes, ordinances, rules and regulations concerning the protection of health and the environment, including storm water and surface water management, soil, groundwater and wetlands protection, subsurface conditions and air quality protection and enhancement. Environmental laws and existing conditions may result in delays, cause us to incur substantial compliance and other costs and prohibit or severely restrict homebuilding activity in environmentally sensitive regions or areas.
Our homebuilding operations are also subject to various local, state and federal statutes, ordinances, rules and regulations concerning zoning, building, design, construction, sales, and similar matters. These regulations increase the cost to produce and market our products, and in some instances, delay our developers’ ability to deliver finished lots to us. Counties and cities in which we build homes have at times declared moratoriums on the issuance of building permits and imposed other restrictions in the areas in which sewage treatment facilities and other public facilities do not reach minimum standards. In addition, our homebuilding operations are regulated in certain areas by restrictive zoning and density requirements that limit the number of homes that can be built within the boundaries of a particular area. We may also experience extended timelines for receiving required approvals from municipalities or other government agencies that can delay our anticipated development and construction activities in our communities.
Our mortgage company and title insurance agencies are subject to various local, state and federal statutes, ordinances, rules and regulations (including requirements for participation in programs offered by FHA, VA, USDA, Ginnie Mae, Fannie Mae and Freddie Mac). These regulations restrict certain activities of our financial services operations as further described in our description of “Risk Factors” below in Item 1A. In addition, our financial services operations are subject to regulation at the state and federal level, including regulations issued by the Consumer Financial Protection Bureau (the “CFPB”), with respect to specific origination, selling and servicing practices.
Seasonality
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. 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 their loan originations correspond with the delivery of homes in our homebuilding operations.
Employees
At December 31, 2019, we employed 1,401 people (including part-time employees), of which 1,110 were employed in homebuilding operations, 186 were employed in financial services and 105 were employed in management and administrative services. No employees are represented by a collective bargaining agreement.
Available Information
We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (“Exchange Act”), and file annual, quarterly and current reports, proxy statements and other information with the SEC. These filings are available to the public on the SEC’s website at www.sec.gov.
Our website address is www.mihomes.com. We make available, free of charge, on or through our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our website also includes printable versions of our Corporate Governance Guidelines, our Code of Business Conduct and Ethics, and the charters for each of our Audit, Compensation, and Nominating and Corporate Governance Committees. The contents of our website are not incorporated by reference in, or otherwise made a part of, this Annual Report on Form 10-K.

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Item 1A. RISK FACTORS
Our future results of operations, financial condition and liquidity and the market price for our securities are subject to numerous risks, many of which are driven by factors that we cannot control. The following cautionary discussion of risks, uncertainties and assumptions relevant to our business includes factors we believe could cause our actual results to differ materially from expected and historical results. Other factors beyond those listed below, including factors unknown to us and factors known to us which we have not currently determined to be material, could also adversely affect our business, results of operations, financial condition, prospects and cash flows. Also see “Special Note of Caution Regarding Forward-Looking Statements” above.
Homebuilding Market and Economic Risks
Although the homebuilding industry generally experienced improved conditions in 2019, a renewed deterioration in industry conditions or in broader economic conditions could have adverse effects on our business and results of operations.

The homebuilding industry is cyclical and affected by changes in general economic, real estate and other business conditions that could adversely affect our results of operations, financial condition and cash flows. Certain economic, real estate and other business conditions that have significant effects on the homebuilding industry include:
employment levels and job and personal income growth;
availability and pricing of financing for homebuyers;
short and long-term interest rates;
overall consumer confidence and the confidence of potential homebuyers in particular;
demographic trends;
changes in energy prices;
housing demand from population growth, household formation and other demographic changes, among other factors;
U.S. and global financial system and credit market stability;
private party and governmental residential consumer mortgage loan programs, and federal and state regulation of lending and appraisal practices;
federal and state personal income tax rates and provisions, including provisions for the deduction of residential consumer mortgage loan interest payments and other expenses;
the supply of and prices for available new or existing homes (including lender-owned homes acquired through foreclosures and short sales) and other housing alternatives, such as apartments and other residential rental property;
homebuyer interest in our current or new product designs and community locations, and general consumer interest in purchasing a home compared to choosing other housing alternatives; and
real estate taxes.
These above conditions, among others, are complex and interrelated. Adverse changes in such business conditions may have a significant negative impact on our business. The negative impact may be national in scope but may also negatively affect some of the regions or markets in which we operate more than others. When such adverse conditions affect any of our larger markets, those conditions could have a proportionately greater impact on us than on some other homebuilding companies. We cannot predict their occurrence or severity, nor can we provide assurance that our strategic responses to their impacts would be successful.
In the event of a downturn in the homebuilding and mortgage lending industries, or if the national economy weakens, we could experience declines in the market value of our inventory and demand for our homes, which could have a significantly negative impact on our gross margins from home sales and financial condition and results of operations. Additional external factors, such as foreclosure rates, mortgage pricing and availability, and unemployment rates, could also negatively impact our results.
Potential customers may be less willing or able to buy our homes if any of these conditions have a negative impact on the homebuilding industry. In the future, our pricing strategies may be limited by market conditions. We may be unable to change the mix of our home offerings, reduce the costs of the homes we build or offer more affordable homes to maintain our gross margins or satisfactorily address changing market conditions in other ways. In addition, cancellations of home sales contracts in backlog may increase.
While the absorption pace of our new contracts per community improved in 2019 compared to 2018, a decline in sales activity could adversely affect our results of operations, financial condition and cash flows.
Our financial services business is closely related to our homebuilding business, as it originates mortgage loans principally on behalf of purchasers of the homes we build. A decrease in the demand for our homes because of the existence of any of the foregoing conditions could also adversely affect the financial results of this segment of our business.

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Additionally, we may be subject to increased counterparty risks, including purchasers of mortgages originated by M/I Financial being unwilling or unable to perform their obligations to us. To the extent a third-party is unwilling or unable to perform such obligations, our financial condition, results of operations and/or cash flows could be negatively impacted.

Increased competition levels in the homebuilding and mortgage lending industries could result in a reduction in our new contracts and homes delivered, along with decreases in the average sales prices of sold and delivered homes and/or decreased mortgage originations, which would have a negative impact on our results of operations.
The homebuilding industry is fragmented and highly competitive. We compete with numerous public and private homebuilders, including some that are substantially larger than us and may have greater financial resources than we do. We also compete with community developers and land development companies, some of which are also homebuilders or affiliates of homebuilders. Homebuilders compete for customers, land, building materials, subcontractor labor and financing. Competition for home orders primarily is based upon home sales price, location of property, home style, financing available to prospective homebuyers, quality of homes built, customer service and general reputation in the community, and may vary by market, sub-market and even by community. Additionally, competition within the homebuilding industry can be impacted by an excess supply of new and existing homes available for sale resulting from a number of factors including, among other things, increases in unsold started homes available for sale and increases in home foreclosures. Increased competition may cause us to decrease our home sales prices and/or increase home sales incentives in an effort to generate new home sales and maintain homes in backlog until they close. Increased competition can also result in us selling fewer homes or experiencing a higher number of cancellations by homebuyers. These competitive pressures may negatively impact our future financial and operating results.
Through our financial services operations, we also compete with numerous banks and other mortgage bankers and brokers, some of which are larger than us and may have greater financial resources than we do. Competitive factors that affect our consumer services operations include pricing, mortgage loan terms, underwriting criteria and customer service. To the extent that we are unable to adequately compete with other companies that originate mortgage loans, the results of operations from our mortgage operations may be negatively impacted.
A reduction in the availability of mortgage financing or a significant increase in mortgage interest rates or down payment requirements could adversely affect our business.
Any reduction in the availability of the financing provided by Fannie Mae and Freddie Mac could adversely affect interest rates, mortgage availability and our sales of new homes and origination of mortgage loans.
FHA and VA mortgage financing support continues to be an important factor in marketing our homes. Any increases in down payment requirements, lower maximum loan amounts, or limitations or restrictions on the availability of FHA and VA financing support could adversely affect interest rates, mortgage availability and our sales of new homes and origination of mortgage loans.
Even if potential customers do not need financing, changes in the availability of mortgage products may make it harder for them to sell their current homes to potential buyers who need financing, which may lead to lower demand for new homes.
Mortgage interest rates remained near historical lows for the last several years. Increases in interest rates increase the costs of owning a home and could reduce the demand for our homes.
Many of our homebuyers obtain financing for their home purchases from M/I Financial. If, due to the factors discussed above, M/I Financial is limited from making or unable to make loan products available to our homebuyers, our home sales and our homebuilding and financial services results of operations may be adversely affected.
If land is not available at reasonable prices or terms, our homes sales revenue and results of operations could be negatively impacted and/or we could be required to scale back our operations in a given market.
Our operations depend on our ability to obtain land for the development of our communities at reasonable prices and with terms that meet our underwriting criteria. Our ability to obtain land for new communities may be adversely affected by changes in the general availability of land, the willingness of land sellers to sell land at reasonable prices, competition for available land, availability of financing to acquire land, zoning, regulations that limit housing density and other market conditions. If the supply of land, and especially developed lots, appropriate for development of communities is limited because of these factors, or for any other reason, the number of homes that we build and sell may decline. To the extent that we are unable to timely purchase land or enter into new contracts for the purchase of land at reasonable prices, due to the lag between the time we acquire land and the time we begin selling homes, our revenue and results of operations could be negatively impacted and/or we could be required to scale back our operations in a given market.

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Our land investment exposes us to significant risks, including potential impairment charges, that could negatively impact our profits if the market value of our inventory declines.
We must anticipate demand for new homes several years prior to homes being sold to homeowners. There are significant risks inherent in controlling or purchasing land, especially as the demand for new homes fluctuates and land purchases become more competitive, as has recently been the case, which can increase the costs of land. There is often a significant lag time between when we acquire land for development and when we sell homes in neighborhoods we have planned, developed and constructed. The value of undeveloped land, building lots and housing inventories can fluctuate significantly as a result of changing market conditions. In addition, inventory carrying costs can be significant, and fluctuations in value can reduce profits. Economic conditions could require that we sell homes or land at a loss, or hold land in inventory longer than planned, which could significantly impact our financial condition, results of operations, cash flows and stock performance. Additionally, if conditions in the homebuilding industry decline in the future, we may be required to evaluate our inventory for potential impairment, which may result in additional valuation adjustments, which could be significant and could negatively impact our financial results and condition. We cannot make any assurances that the measures we employ to manage inventory risks and costs will be successful.
Supply shortages and risks related to the demand for skilled labor and building materials could increase costs and delay deliveries.
The residential construction industry experiences labor and material shortages and risks from time to time, including: work stoppages; labor disputes; shortages in qualified subcontractors and construction personnel; lack of availability of adequate utility infrastructure and services; our need to rely on local subcontractors who may not be adequately capitalized or insured; and delays in availability, or fluctuations in prices, of building materials. These labor and material shortages and risks can be more severe during periods of strong demand for housing or during periods in which the markets where we operate experience natural disasters that have a significant impact on existing residential and commercial structures. Any of these circumstances could delay the start or completion of our communities, increase the cost of developing one or more of our communities and increase the construction cost of our homes. To the extent that market conditions prevent the recovery of increased costs, including, among other things, subcontracted labor, developed lots, building materials, and other resources, through higher sales prices, our gross margins from home sales and results of operations could be adversely affected.
Increased costs of lumber, framing, concrete, steel and other building materials could increase our construction costs. We generally are unable to pass on increases in construction costs to customers who have already entered into sales contracts, as those sales contracts generally fix the price of the homes at the time the contracts are signed, which may occur before construction begins. During 2019, we experienced increases in construction costs primarily due to the competitive market for skilled labor and increased material costs resulting from inflationary pressures and normal supply and demand dynamics of the industry. Increases in construction costs that exceeded our increase in home pricing eroded our gross margins from home sales during 2019 and may continue to reduce our gross margins, particularly if pricing competition restricts our ability to pass on any additional costs of materials or labor, thereby decreasing our gross margins from home sales.
We depend on the continued availability of and satisfactory performance of subcontracted labor for the construction of our homes and to provide related materials. We have experienced, and may continue to experience, modest skilled labor and material shortages in certain of our markets as supply adjusts to demand. The cost of labor may also be adversely affected by shortages of qualified subcontractors and construction personnel, changes in laws and regulations relating to union activity and changes in immigration laws and trends in labor migration. We cannot provide any assurance that there will be a sufficient supply of materials or a sufficient supply of, or satisfactory performance by, these unaffiliated third-party subcontractors, which could have a material adverse effect on our business.
Tax law changes could make home ownership more expensive and/or less attractive.
Prior to the enactment of the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”), which was signed into law in December 2017, significant expenses of owning a home, including residential consumer mortgage loan interest costs and real estate taxes, generally were deductible expenses for the purpose of calculating an individual’s federal, and in some cases state, taxable income, subject to various limitations. The 2017 Tax Act established new limits on the federal tax deductions individual taxpayers may take on mortgage loan interest payments and on state and local taxes, including real estate taxes. Through the end of 2025, under the 2017 Tax Act, the annual deduction for real estate taxes and state and local income or sales taxes generally is limited to $10,000. Furthermore, through the end of 2025, the deduction for mortgage interest is only available with respect to acquisition indebtedness that does not exceed $750,000. The 2017 Tax Act also raised the standard deduction to help fully or partially offset these new limits. These changes could, however, reduce the actual or perceived affordability of homeownership, and therefore the demand for homes, and/or have a moderating impact on home sales prices, especially in areas with relatively high housing prices and/or high state and local income taxes and real estate taxes. In addition, if the federal government further changes, or a state government changes, its income tax laws by eliminating or substantially reducing the income tax benefits associated with homeownership, the

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after-tax cost of owning a home could measurably increase. Any increases in personal income tax rates and/or tax deduction limits or restrictions enacted at the federal or state levels, including those enacted under the 2017 Tax Act, could adversely impact demand for and/or selling prices of new homes, including our homes, and the effect on our consolidated financial statements could be adverse and material.
We may not be able to offset the impact of inflation through price increases.
Inflation can have a long-term impact on us because if the costs of land, materials and labor increase, we would need to increase the sale prices of our homes to maintain satisfactory margins. In a highly inflationary environment, we may not be able to raise home prices enough to keep pace with the increased costs of land and house construction, which could reduce our profit margins. In addition, significant inflation is often accompanied by higher interest rates, which have a negative impact on demand for our homes, and would likely also increase our cost of capital. Although the overall rate of inflation has been low for the last several years, we have experienced increases in the prices of land and construction costs that in some cases have exceeded our ability to raise the sales prices on our homes, which put downward pressure on our margins in 2019, and such pressures may continue.
Our limited geographic diversification could adversely affect us if the demand for new homes in our markets declines.
We have operations in Ohio, Indiana, Illinois, Michigan, Minnesota, North Carolina, Florida and Texas. Our limited geographic diversification could adversely impact us if the demand for new homes or the level of homebuilding activity in our current markets declines, since there may not be a balancing opportunity in a stronger market in other geographic regions.
Changes in energy prices may have an adverse effect on the economies in certain markets we operate in and our cost of building homes.
The economies of some of the markets in which we operate are impacted by the health of the energy industry. To the extent that energy prices decline, the economies of certain of our markets may be negatively impacted which could have a material adverse effect on our business. Furthermore, the pricing offered by our suppliers and subcontractors can be adversely affected by increases in various energy costs resulting in a negative impact on our financial condition, results of operations and cash flows.
Operational Risks
We may not be successful in integrating acquisitions or implementing our growth strategies or in achieving the benefits we expect from such acquisitions and strategies.
We may in the future consider growth or expansion of our operations in our current markets or in other areas of the country, whether through strategic acquisitions of homebuilding companies or otherwise. The magnitude, timing and nature of any future expansion will depend on a number of factors, including our ability to identify suitable additional markets and/or acquisition candidates, the negotiation of acceptable terms, our financial capabilities and general economic and business conditions. Our expansion into new or existing markets, whether through acquisition or otherwise, could have a material adverse effect on our liquidity and/or profitability, and any future acquisitions could result in the dilution of existing shareholders if we issue our common shares as consideration. Acquisitions also involve numerous risks, including difficulties in the assimilation of the acquired company’s operations, the incurrence of unanticipated liabilities or expenses, the risk of impairing inventory and other assets related to the acquisition, the diversion of management’s attention and resources from other business concerns, risks associated with entering markets in which we have limited or no direct experience and the potential loss of key employees of the acquired company. In addition, we may not be able to improve our earnings as a result of acquisitions, and our failure to successfully identify and manage future acquisitions could have an adverse impact on our operating results.
We may write-off intangible assets, such as goodwill.

We recorded goodwill in connection with our acquisition of the assets and operations of Pinnacle Homes. On an ongoing basis, we will evaluate whether facts and circumstances indicate any impairment of the value of intangible assets. As circumstances change, we cannot provide any assurance that we will realize the value of these intangible assets. If we determine that a significant impairment has occurred, we will be required to write-off the impaired portion of intangible assets, which could have a material adverse effect on our results of operations in the period in which the write-off occurs.

We have financial needs that we meet through the capital markets, including the debt and secondary mortgage markets, and disruptions in these markets could have an adverse impact on our results of operations, financial position and/or cash flows.
We have financial needs that we meet through the capital markets, including the debt and secondary mortgage markets. Our requirements for additional capital, whether to finance operations or to service or refinance our existing indebtedness, fluctuate

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as market conditions and our financial performance and operations change. We cannot provide assurances that we will maintain cash reserves and generate cash flow from operations in an amount sufficient to enable us to service our debt or to fund other liquidity needs.
The availability of additional capital, whether from private capital sources or the public capital markets, fluctuates as our financial condition and general market conditions change. There may be times when the private capital markets and the public debt or equity markets lack sufficient liquidity or when our securities cannot be sold at attractive prices, in which case we would not be able to access capital from these sources. In addition, a weakening of our financial condition or deterioration in our credit ratings could adversely affect our ability to obtain necessary funds. Even if financing is available, it could be costly or have other adverse consequences.
There are a limited number of third-party purchasers of mortgage loans originated by our financial services operations. The exit of third-party purchasers of mortgage loans from the business, reduced investor demand for mortgage loans and mortgage-backed securities in the secondary mortgage markets and increased investor yield requirements for those loans and securities may have an adverse impact on our results of operations, financial position and/or cash flows.
The M/I Financial warehouse facilities will expire in 2020.
M/I Financial uses two mortgage warehouse facilities to finance eligible residential mortgage loans originated by M/I Financial, a $125 million secured mortgage warehousing agreement (the “MIF Mortgage Warehousing Agreement”) and a $65 million mortgage repurchase facility (the “MIF Mortgage Repurchase Facility”). These facilities will expire on June 19, 2020 and October 26, 2020, respectively. If we are unable to renew or replace the warehousing facilities when they mature, the activities of our financial services segment could be impeded and our home sales and our homebuilding and financial services results of operations may be adversely affected.
Reduced numbers of home sales may force us to absorb additional carrying costs.
We incur many costs even before we begin to build homes in a community. These include costs of preparing land and installing roads, sewage and other utilities, as well as taxes and other costs related to ownership of the land on which we plan to build homes. Reducing the rate at which we build homes extends the length of time it takes us to recover these additional costs. Also, we frequently enter into contracts to purchase land and make deposits that may be forfeited if we do not fulfill our purchase obligation within specified periods.
If our ability to resell mortgages to investors is impaired, we may be required to broker loans.
M/I Financial sells a portion of the loans originated on a servicing released, non-recourse basis, although M/I Financial remains liable for certain limited representations and warranties related to loan sales and for repurchase obligations in certain limited circumstances. If M/I Financial is unable to sell to viable purchasers in the marketplace, our ability to originate and sell mortgage loans at competitive prices could be limited which would negatively affect our operations and our profitability. Additionally, if there is a significant decline in the secondary mortgage market, our ability to sell mortgages could be adversely impacted and we would be required to make arrangements with banks or other financial institutions to fund our buyers’ closings. If we became unable to sell loans into the secondary mortgage market or directly to Fannie Mae and Freddie Mac or issue Ginnie Mae securities, we would have to modify our origination model, which, among other things, could significantly reduce our ability to sell homes.
Mortgage investors could seek to have us buy back loans or compensate them for losses incurred on mortgages we have sold based on claims that we breached our limited representations or warranties.
M/I Financial originates mortgages, primarily for our homebuilding customers. A portion of the mortgage loans originated are sold on a servicing released, non-recourse basis, although we remain liable for certain limited representations, such as fraud, and warranties related to loan sales. Accordingly, mortgage investors have in the past and could in the future seek to have us buy back loans or compensate them for losses incurred on mortgages we have sold based on claims that we breached our limited representations or warranties. There can be no assurance that we will not have significant liabilities in respect of such claims in the future, which could exceed our reserves, or that the impact of such claims on our results of operations will not be material.

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Our results of operations, financial condition and cash flows could be adversely affected if pending or future legal claims against us are not resolved in our favor.
In addition to the legal proceedings related to stucco discussed below, 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 adverse effect on the Company’s results of operations, financial condition, 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 adverse effect on the Company’s results of operations, financial condition, and cash flows.

Similarly, if additional legal proceedings are filed against us in the future, including with respect to stucco installation in our Florida communities, the negative outcome of one or more of such legal proceedings could have a material adverse effect on our results of operations, financial condition and cash flows.

The terms of our indebtedness may restrict our ability to operate and, if our financial performance declines, we may be unable to maintain compliance with the covenants in the documents governing our indebtedness.
Our $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”), the indenture governing our newly issued 4.95% Senior Notes due 2028 (the “2028 Senior Notes”) (see Note 11 to our Consolidated Financial Statements for additional information) and the indenture governing our 5.625% Senior Notes due 2025 (the “2025 Senior Notes”) impose restrictions on our operations and activities. These restrictions and/or our failure to comply with the terms of our indebtedness could have a material adverse effect on our results of operations, financial condition and ability to operate our business.
Under the terms of the Credit Facility, we are required, among other things, to maintain compliance with various covenants, including financial covenants relating to a minimum consolidated tangible net worth requirement, a minimum interest coverage ratio or liquidity requirement, and a maximum leverage ratio. Failure to comply with these covenants or any of the other restrictions of the Credit Facility, whether because of a decline in our operating performance or otherwise, could result in a default under the Credit Facility. If a default occurs, the affected lenders could elect to declare the indebtedness, together with accrued interest and other fees, to be immediately due and payable, which in turn could cause a default under the documents governing any of our other indebtedness that is then outstanding if we are not able to repay such indebtedness from other sources. If this happens and we are unable to obtain waivers from the required lenders, the lenders could exercise their rights under such documents, including forcing us into bankruptcy or liquidation.
The indenture governing the 2028 Senior Notes and the indenture governing the 2025 Senior Notes also contain covenants that may restrict our ability to operate our business and may prohibit or limit our ability to grow our operations or take advantage of potential business opportunities as they arise. Failure to comply with these covenants or any of the other restrictions or covenants contained in the indenture governing the 2028 Senior Notes and/or the indenture governing the 2025 Senior Notes could result in a default under the applicable indenture, in which case holders of the 2028 Senior Notes and/or the 2025 Senior Notes may be entitled to cause the sums evidenced by such notes to become due immediately. This acceleration of our obligations under the 2028 Senior Notes and the 2025 Senior Notes could force us into bankruptcy or liquidation and we may be unable to repay those amounts without selling substantial assets, which might be at prices well below the long-term fair values and carrying values of the assets. Our ability to comply with the foregoing restrictions and covenants may be affected by events beyond our control, including prevailing economic, financial and industry conditions.
Our indebtedness could adversely affect our financial condition, and we and our subsidiaries may incur additional indebtedness, which could increase the risks created by our indebtedness.
As of December 31, 2019, we had approximately $617.9 million of indebtedness (net of debt issuance costs), excluding issuances of letters of credit, the MIF Mortgage Warehousing Agreement and the MIF Mortgage Repurchase Facility, and we had $364.9 million of remaining availability for borrowings under the Credit Facility. In addition, under the terms of the Credit Facility, the indentures governing the 2028 Senior Notes and the 2025 Senior Notes and the documents governing our other indebtedness, we have the ability, subject to applicable debt covenants, to incur additional indebtedness. The incurrence of additional indebtedness could magnify other risks related to us and our business. Our indebtedness and any future indebtedness we may incur could have a significant adverse effect on our future financial condition.

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For example:
a significant portion of our cash flow may be required to pay principal and interest on our indebtedness, which could reduce the funds available for working capital, capital expenditures, acquisitions or other purposes;
borrowings under the Credit Facility bear, and borrowings under any new facility could bear, interest at floating rates, which could result in higher interest expense in the event of an increase in interest rates;
the terms of our indebtedness could limit our ability to borrow additional funds or sell assets to raise funds, if needed, for working capital, capital expenditures, acquisitions or other purposes;
our debt level and the various covenants contained in the Credit Facility, the indentures governing our 2028 Senior Notes and 2025 Senior Notes and the documents governing our other indebtedness could place us at a relative competitive disadvantage as compared to some of our competitors; and
the terms of our indebtedness could prevent us from raising the funds necessary to repurchase all of the 2028 Senior Notes and the 2025 Senior Notes tendered to us upon the occurrence of a change of control, which, in each case, would constitute a default under the applicable indenture, which in turn could trigger a default under the Credit Facility and the documents governing our other indebtedness.
In the ordinary course of business, we are required to obtain performance bonds from surety companies, the unavailability of which could adversely affect our results of operations and/or cash flows.
As is customary in the homebuilding industry, we are often required to provide surety bonds to secure our performance under construction contracts, development agreements and other arrangements. Our ability to obtain surety bonds primarily depends upon our credit rating, capitalization, working capital, past performance, management expertise and certain external factors, including the overall capacity of the surety market and the underwriting practices of surety bond issuers. The ability to obtain surety bonds also can be impacted by the willingness of insurance companies and sureties to issue performance bonds. If we were unable to obtain surety bonds when required, our results of operations and/or cash flows could be adversely impacted.
We can be injured by failures of persons who act on our behalf to comply with applicable regulations and guidelines.
There are instances in which subcontractors or others through whom we do business engage in practices that do not comply with applicable regulations or guidelines. When we learn of practices relating to homes we build or financing we provide that do not comply with applicable laws, rules or regulations, we actively move to stop the non-complying practices as soon as possible. However, regardless of the steps we take after we learn of practices that do not comply with applicable laws, rules or regulations, we can in some instances be subject to fines or other governmental penalties, and our reputation can be injured, due to the practices having taken place.
We could be adversely affected by efforts to impose joint employer liability on us for labor law violations committed by our subcontractors.
Our homes are constructed by employees of subcontractors and other parties. We have limited ability to control what these parties pay their employees or the rules they impose on their employees. However, various governmental agencies may seek to hold parties like us responsible for violations of wage and hour laws and other labor laws by subcontractors. A ruling by the National Labor Relations Board (“NLRB”) that a company, under some circumstances, could be held responsible for labor violations by its contractors was withdrawn, and the NLRB is currently considering a rule that would make it less likely that we could be deemed to be a joint employer of our subcontractors’ employees. However, future rulings by the NLRB or other courts or governmental agencies could make us responsible for labor violations committed by our subcontractors. Governmental rulings that hold us responsible for labor practices by our subcontractors could create substantial exposures for us under our subcontractor relationships.
Because of the seasonal nature of our business, our quarterly operating results can fluctuate.
We experience noticeable seasonality and quarter-to-quarter variability in homebuilding activity levels. In general, the number of homes delivered and associated home sales revenue increase during the third and fourth quarters, compared with the first and second quarters. We believe that this type of seasonality reflects the historical tendency of homebuyers to purchase new homes in the spring and summer with deliveries scheduled in the fall or winter, as well as the scheduling of construction to accommodate seasonal weather conditions in certain markets. There can be no assurance that this seasonality pattern will continue to exist in future reporting periods. In addition, as a result of such variability, our historical performance may not be a meaningful indicator of future results.

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Homebuilding is subject to construction defect, product liability and warranty claims that can be significant and costly.
As a homebuilder, we are subject to construction defect, product liability and warranty claims in the ordinary course of business. These claims are common in the homebuilding industry and can be significant and costly. We and many of our subcontractors have general liability, property, workers compensation and other business insurance. This insurance is intended to protect us against a portion of our risk of loss from claims, subject to certain self-insured retentions, deductibles and other coverage limits. The availability of insurance for construction defects, and the scope of the coverage, are currently limited and the policies that can be obtained are costly and often include exclusions. There can be no assurance that coverage will not be further restricted or become more costly. Also, at times we have waived certain provisions of our customary subcontractor insurance requirements, which increases our and our insurers’ exposure to claims and increases the possibility that our insurance will not be adequate to protect us for all the costs we incur.

We record warranty and other reserves for the homes we sell based on a number of factors, including historical experience in our markets, insurance and actuarial assumptions and our judgment with respect to the qualitative risks associated with the types of homes we build. Because of the high degree of judgment required in determining these liability reserves, our actual future liability could differ significantly from our reserves. Given the inherent uncertainties, we cannot provide assurance that our insurance coverage, our subcontractor arrangements and our reserves will be adequate to address all of our construction defect, product liability and warranty claims. If the costs to resolve these claims exceed our estimates, our results of operations, financial condition and cash flows could be adversely affected.
We have received claims related to stucco installation from homeowners in certain of our communities in our Tampa and Orlando, Florida markets and have been named as a defendant in legal proceedings initiated by certain of such homeowners. While we have estimated our overall future stucco repair costs, our review of the stucco-related issues in our Florida communities is ongoing. Our estimate of our overall stucco repair costs is based on our judgment, various assumptions and internal data. Given the inherent uncertainties, we cannot provide assurance that the final costs to resolve these claims will not exceed our accrual and adversely affect our results of operations, financial condition and cash flows. See Note 1 and Note 8 to the Company’s Consolidated Financial Statements for further information regarding these stucco claims and our warranty reserves.

Our subcontractors can expose us to warranty and other risks.
We rely on subcontractors to construct our homes, and in many cases, to select and obtain building materials. Despite our detailed specifications and quality control procedures, in some cases, it may be determined that subcontractors used improper construction processes or defective materials in the construction of our homes. Although our subcontractors have principal responsibility for defects in the work they do, we have ultimate responsibility to the homebuyers. When we find these issues, we repair them in accordance with our warranty obligations. Improper construction processes and defective products widely used in the homebuilding industry can result in the need to perform extensive repairs to large numbers of homes. The cost of complying with our warranty obligations may be significant if we are unable to recover the cost of repairs from subcontractors, materials suppliers and insurers.
We also can suffer damage to our reputation, and may be exposed to possible liability, if subcontractors fail to comply with applicable laws, including laws involving things that are not within our control. When we learn about potentially improper practices by subcontractors, we try to cause the subcontractors to discontinue them. However, we may not always be able to cause our subcontractors to discontinue potentially improper practices, and even when we can, we may not be able to avoid claims against us relating to prior actions of our subcontractors.

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Damage to our corporate reputation or brands from negative publicity could adversely affect our business, financial results and/or stock price.
Adverse publicity related to our company, industry, personnel, operations or business performance may cause damage to our corporate reputation or brands and may generate negative sentiment, potentially affecting the performance of our business or our stock price, regardless of its accuracy. Negative publicity can be disseminated rapidly through digital platforms, including social media, websites, blogs and newsletters. Customers and other interested parties value readily available information and often act on such information without further investigation and without regard to its accuracy. The harm may be immediate without affording us an opportunity for redress or correction, and our success in preserving our brand image depends on our ability to recognize, respond to and effectively manage negative publicity in a rapidly changing environment. Adverse publicity or unfavorable commentary from any source could damage our reputation, reduce the demand for our homes or negatively impact the morale and performance of our employees, which could adversely affect our business.
Natural disasters and severe weather conditions could delay deliveries, increase costs and decrease demand for homes in affected areas.
Several of our markets, specifically our operations in Florida, North Carolina and Texas, are situated in geographical areas that are regularly impacted by severe storms, including hurricanes, flooding and tornadoes. In addition, our operations in the Northern Region can be impacted by severe storms, including tornadoes. The occurrence of these or other natural disasters can cause delays in the completion of, or increase the cost of, developing one or more of our communities, and as a result could materially and adversely impact our results of operations.
We are subject to extensive government regulations, which could restrict our business and cause us to incur significant expense.
The homebuilding industry is subject to numerous local, state, and federal statutes, ordinances, rules, and regulations concerning building, zoning, sales, consumer protection, the environment, and similar matters. This regulation affects construction activities as well as sales activities, mortgage lending activities, land availability and other dealings with homebuyers. These statutes, ordinances, rules, and regulations, and any failure to comply therewith, could give rise to additional liabilities or expenditures and have an adverse effect on our results of operations, financial condition or business.
We must also obtain licenses, permits and approvals from various governmental authorities in connection with our development activities, and these governmental authorities often have broad discretion in exercising their approval authority. Municipalities may also restrict or place moratoriums on the availability of utilities, such as water and sewer taps. In some areas, municipalities may enact growth control initiatives, which will restrict the number of building permits available in a given year. In addition, we may be required to apply for additional approvals or modify our existing approvals because of changes in local circumstances or applicable law. If municipalities in which we operate take actions like these, it could have an adverse effect on our business by causing delays, increasing our costs, or limiting our ability to operate in those municipalities.
We incur substantial costs related to compliance with legal and regulatory requirements. Any increase in legal and regulatory requirements may cause us to incur substantial additional costs or, in some cases, cause us to determine that certain property is not feasible for development.
Information technology failures and data security breaches could harm our business.
We use information technology, digital communications and other computer resources to carry out important operational and marketing activities and to maintain our business records. We have implemented systems and processes intended to address ongoing and evolving cyber-security risks, secure our information technology, applications and computer systems, and prevent unauthorized access to or loss of sensitive, confidential and personal data. We also provide regular personnel awareness training regarding potential cyber-security threats, including the use of internal tips, reminders and phishing assessments, to help ensure employees remain diligent in identifying potential risks. In addition, we have deployed monitoring capabilities to support early detection, internal and external escalation, and effective responses to potential anomalies. Many of our information technology and other computer resources are provided to us and/or maintained on our behalf by third-party service providers pursuant to agreements that specify to varying degrees certain security and service level standards. We also rely upon our third-party service providers to maintain effective cyber-security measures to keep our information secure and to carry cyber insurance. Although we and our service providers employ what we believe are adequate security, disaster recovery and other preventative and corrective measures, our security measures, taken as a whole, may not be sufficient for all possible situations and may be vulnerable to, among other things, hacking, employee error, system error and faulty password management.
Our ability to conduct our business may be impaired if these informational technology and computer resources, including our website, are compromised, degraded, damaged or fail, whether due to a virus or other harmful circumstance, intentional penetration

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or disruption of our information technology resources by a third party, natural disaster, hardware or software corruption or failure or error (including a failure of security controls incorporated into or applied to such hardware or software), telecommunications system failure, service provider error or failure or intentional or unintentional personnel actions (including the failure to follow our security protocols), or lost connectivity to our networked resources. A significant disruption in the functioning of these resources, or breach thereof, including our website, could damage our reputation and cause us to lose customers, sales and revenue.

In addition, breaches of our information technology systems or data security systems, including cyber-attacks, could result in the unintended and/or unauthorized public disclosure or the misappropriation of proprietary, personal identifying and confidential information (including information we collect and retain in connection with our business about our homebuyers, business partners and employees), and require us to incur significant expense (that we may not be able to recover in whole or in part from our service providers or responsible parties, or their or our insurers) to address and remediate or otherwise resolve. The unintended and/or unauthorized public disclosure or the misappropriation of proprietary, personal identifying or confidential information may also lead to litigation or other proceedings against us by affected individuals and/or business partners and/or by regulators, and the outcome of such proceedings, which could include losses, penalties, fines, injunctions, expenses and charges recorded against our earnings, could have a material and adverse effect on our financial position, results of operations and cash flows and harm our reputation. In addition, the costs of maintaining adequate protection against such threats, based on considerations of their evolution, increasing sophistication, pervasiveness and frequency and/or increasingly demanding government-mandated standards or obligations regarding information security and privacy, could be material to our consolidated financial statements in a particular period or over various periods.
We are dependent on the services of certain key employees, and the loss of their services could hurt our business.
Our future success depends, in part, on our ability to attract, train and retain skilled personnel. If we are unable to retain our key employees or attract, train and retain other skilled personnel in the future, this could materially and adversely impact our operations and result in additional expenses for identifying and training new personnel.
Item 1B.
UNRESOLVED STAFF COMMENTS
None.
Item 2.
PROPERTIES
On December 31, 2019, we sold our 85,000 square foot office building that had been used for our home office in Columbus, Ohio. We have entered into a lease for a new home office in Columbus, Ohio and expect to move into the new office location in April 2020. See Note 1 to our Consolidated Financial Statements in Item 8 of this Form 10-K. We lease all of our other offices (see Note 9 to our Consolidated Financial Statements in Item 8 of this Form 10-K for additional information regarding our office leases).
Due to the nature of our business, a substantial amount of property is held as inventory in the ordinary course of business. See “Item 1. BUSINESS – Land Acquisition and Development” and “Item 1. BUSINESS – Backlog.”
Item 3.
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 8 to the Company’s Consolidated 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.
Item 4. MINE SAFETY DISCLOSURES
None.

20



PART II

Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market for Common Shares and Dividends
The Company’s common shares are traded on the New York Stock Exchange under the symbol “MHO.” As of February 19, 2020, there were approximately 445 record holders of the Company’s common shares. At that date, there were 30,137,141 common shares issued and 28,578,537 common shares outstanding.
Performance Graph
The following graph illustrates the Company’s performance in the form of cumulative total return to holders of our common shares for the last five calendar years through December 31, 2019, assuming a hypothetical investment of $100 and reinvestment of all dividends paid on such investment, compared to the cumulative total return of the same hypothetical investment in both the Standard and Poor’s 500 Stock Index and the Standard & Poor’s 500 Homebuilding Index.
chart-2018.jpg
 
Period Ending
Index
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/31/2019
M/I Homes, Inc.
$
100.00

$
95.47

$
109.67

$
149.83

$
91.55

$
171.39

S&P 500
100.00

101.38

113.51

138.29

132.23

173.86

S&P 500 Homebuilding Index
100.00

108.55

99.00

171.62

116.27

175.33


21



Share Repurchases
There were no repurchases made by, or on behalf of, the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act) of the Company’s common shares during the fourth quarter of the fiscal year ended December 31, 2019.
ITEM 6.  SELECTED FINANCIAL DATA
The following table sets forth our selected consolidated financial data as of the dates and for the periods indicated.  This table should be read together with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements, including the Notes thereto, contained in this Annual Report on Form 10-K. These historical results may not be indicative of future results.
(In thousands, except per share amounts)
2019
2018
2017
2016
2015
Income Statement (Year Ended December 31):
 
 
 
 
 
Revenue
$
2,500,290

$
2,286,282

$
1,961,971

$
1,691,327

$
1,418,395

Gross margin (a)
$
489,427

$
443,769

$
393,268

$
329,152

$
300,094

Income before income taxes (a) (b) (c)
$
166,025

$
141,289

$
120,324

$
91,785

$
86,929

Net income (a) (b) (c) (d)
$
127,587

$
107,663

$
72,081

$
56,609

$
51,763

Preferred dividends
$

$

$
3,656

$
4,875

$
4,875

Excess of fair value over book value of preferred shares redeemed
$

$

$
2,257

$

$

Net income to common shareholders
$
127,587

$
107,663

$
66,168

$
51,734

$
46,888

Earnings per share to common shareholders:
 

 

 

 

 

Basic:
$
4.58

$
3.81

$
2.57

$
2.10

$
1.91

Diluted:
$
4.48

$
3.70

$
2.26

$
1.84

$
1.68

Weighted average shares outstanding:
 

 

 

 

 

Basic
27,846

28,234

25,769

24,666

24,575

Diluted
28,475

29,178

30,688

30,116

30,047

Balance Sheet (December 31):
 

 

 

 

 

Inventory
$
1,769,507

$
1,674,460

$
1,414,574

$
1,215,934

$
1,112,042

Total assets
$
2,105,594

$
2,021,581

$
1,864,771

$
1,548,511

$
1,415,554

Notes payable banks – homebuilding operations
$
66,000

$
117,400

$

$
40,300

$
43,800

Notes payable banks – financial services operations
$
136,904

$
153,168

$
168,195

$
152,895

$
123,648

Notes payable - other
$
5,828

$
5,938

$
10,576

$
6,415

$
8,441

Convertible senior subordinated notes due 2017 - net
$

$

$

$
57,093

$
56,518

Convertible senior subordinated notes due 2018 - net
$

$

$
86,132

$
85,423

$
84,714

Senior notes - net
$
546,080

$
544,455

$
542,831

$
295,677

$
294,727

Shareholders’ equity
$
1,003,477

$
855,303

$
747,298

$
654,174

$
596,566

(a)
Includes $0.6 million ($0.02 per diluted share) and $5.1 million ($0.13 per diluted share) of pre-tax acquisition-related charges taken during 2019 and 2018, respectively, as a result of our acquisition of Pinnacle Homes in Detroit, Michigan on March 1, 2018, pre-tax charges of $8.5 million ($0.18 per diluted share) and $19.4 million ($0.40 per diluted share) for stucco-related repair costs in certain of our Florida communities (as more fully discussed in Note 8 to our Consolidated Financial Statements) taken during the years ended December 31, 2017 and 2016, respectively, and $5.0 million ($0.18 per diluted share), $5.8 million ($0.15 per diluted share), $7.7 million ($0.16 per diluted share), $4.0 million ($0.08 per diluted share), and $3.6 million ($0.08 per diluted share) related to pre-tax impairment charges taken during the years ended December 31, 2019, 2018, 2017, 2016 and 2015, respectively.
(b)
Includes $1.7 million ($0.05 per diluted share) of pre-tax charges related to acquisition and integration costs taken during 2018 as a result of our acquisition of Pinnacle Homes.
(c)
Includes a pre-tax charge of $7.8 million ($0.16 per diluted share) for the loss on early extinguishment of debt taken during the year ended December 31, 2015.
(d)
Includes a non-cash provisional tax expense of approximately $6.5 million ($0.21 per diluted share) related to the re-measurement of our deferred tax assets as a result of the 2017 Tax Act enacted in December 2017 for the year ended December 31, 2017.

22



ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW
M/I Homes, Inc. and subsidiaries (the “Company” or “we”) is one of the nation’s leading builders of single-family homes, having sold over 118,200 homes since commencing 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. 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 first quarter of 2019, we decided to wind down our Washington, D.C. operations, which we substantially completed by the end of 2019. See Note 15 to our Consolidated Financial Statements for more information regarding our decision to wind down our operations in Washington, D.C. and our re-evaluation of our reporting segments as a result of this wind-down.
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:
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.

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES AND POLICIES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period.  Management bases its estimates and assumptions on historical experience and various other factors that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.  On an ongoing basis, management evaluates such estimates and assumptions and makes adjustments as deemed necessary.  Actual results could differ from these estimates using different estimates and assumptions, or if conditions are significantly different in the future. See “Forward - Looking Statements” above in Part I.
Listed below are those estimates and policies that we believe are critical and require the use of complex judgment in their application. Our critical accounting estimates should be read in conjunction with the Notes to our Consolidated Financial Statements.
Revenue Recognition.  Revenue and the related profit from the sale of a home and revenue and the related profit from the sale of land to third parties are recognized in the financial statements on the date of closing if delivery has occurred, title has passed to the buyer, all performance obligations (as defined below) have been met, and control of the home or land is transferred to the buyer in an amount that reflects the consideration we expect to be entitled to in exchange for the home or land. If not received immediately upon closing, cash proceeds from home closings are held in escrow for the Company’s benefit, typically for up to three days, and are included in Cash, cash equivalents and restricted cash on the Consolidated Balance Sheets.
Sales incentives vary by type of incentive and by amount on a community-by-community and home-by-home basis. The costs of any sales incentives in the form of free or discounted products and services provided to homebuyers are reflected in Land and housing costs in the Consolidated Statements of Income because such incentives are identified in our home purchase contracts with homebuyers as an intrinsic part of our single performance obligation to deliver and transfer title to their home for the transaction price stated in the contracts. Sales incentives that we may provide in the form of closing cost allowances are recorded as a reduction of housing revenue at the time the home is delivered.

We record sales commissions within Selling expenses in the Consolidated Statements of Income when incurred (i.e. when the home is delivered) as the amortization period is generally one year or less and therefore capitalization is not required as part of the practical expedient for incremental costs of obtaining a contract.
Contract liabilities include customer deposits related to sold but undelivered homes. Substantially all of our home sales are scheduled to close and be recorded to revenue within one year from the date of receiving a customer deposit. Contract liabilities

23



expected to be recognized as revenue, excluding revenue pertaining to contracts that have an original expected duration of one year or less, is not material.

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

Although our third party land sale contracts may include multiple performance obligations, the revenue we expect to recognize in any future year related to remaining performance obligations, excluding revenue pertaining to contracts that have an original expected duration of one year or less, is not material. We do not disclose the value of unsatisfied performance obligations for land sale contracts with an original expected duration of one year or less.
We recognize the majority of the revenue associated with our mortgage loan operations when the mortgage loans are sold and/or related servicing rights are sold to third party investors or retained and managed under a third party sub-service arrangement. The revenue recognized is reduced by the fair value of the related guarantee provided to the investor. The fair value of the guarantee is recognized in revenue when the Company is released from its obligation under the guarantee. We recognize financial services revenue associated with our title operations as homes are delivered, closing services are rendered, and title policies are issued, all of which generally occur simultaneously as each home is delivered. All of the underwriting risk associated with title insurance policies is transferred to third-party insurers.
See Note 1 to our Consolidated Financial Statements for additional information related to our revenues disaggregated by geography and revenue source.
Inventory. Inventory includes the costs of land acquisition, land development and home construction, capitalized interest, real estate taxes, direct overhead costs incurred during development and home construction, and common costs that benefit the entire community, less impairments, if any. Land acquisition, land development and common costs (both incurred and estimated to be incurred) are typically allocated to individual lots based on the total number of lots expected to be closed in each community or phase, or based on the relative fair value, the relative sales value or the front footage method of each lot. Any changes to the estimated total development costs of a community or phase are allocated proportionately to the homes remaining in the community or phase and homes previously closed. The cost of individual lots is transferred to homes under construction when home construction begins. Home construction costs are accumulated on a specific identification basis. Costs of home deliveries include the specific construction cost of the home and the allocated lot costs. Such costs are charged to cost of sales simultaneously with revenue recognition, as discussed above. When a home is closed, we typically have not yet paid all incurred costs necessary to complete the home. As homes close, we compare the home construction budget to actual recorded costs to date to estimate the additional costs to be incurred from our subcontractors related to the home. We record a liability and a corresponding charge to cost of sales for the amount we estimate will ultimately be paid related to that home. We monitor the accuracy of such estimates by comparing actual costs incurred in subsequent months to the estimate. Although actual costs to complete a home in the future could differ from our estimates, our method has historically produced consistently accurate estimates of actual costs to complete closed homes.
Inventory is recorded at cost, unless events and circumstances indicate that the carrying value of the land is impaired, at which point the inventory is written down to fair value as required by Accounting Standards Codification (“ASC”) 360-10, Property, Plant and Equipment (“ASC 360”). The Company assesses inventory for recoverability on a quarterly basis if events or changes in local or national economic conditions indicate that the carrying amount of an asset may not be recoverable. In conducting our quarterly review for indicators of impairment on a community level, we evaluate, among other things, margins on sales contracts in backlog, the margins on homes that have been delivered, expected changes in margins with regard to future home sales over the life of the community, expected changes in margins with regard to future land sales, the value of the land itself as well as any results from third-party appraisals. From the review of all of these factors, we identify communities whose carrying values may exceed their estimated undiscounted future cash flows and run a test for recoverability. For those communities whose carrying values exceed the estimated undiscounted future cash flows and which are deemed to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the communities exceeds the estimated fair value. Due to the fact that the Company’s cash flow models and estimates of fair values are based upon management estimates and assumptions, unexpected changes in market conditions and/or changes in management’s intentions with respect to the inventory may lead the Company to incur additional impairment charges in the future. Because each inventory asset is unique, there are numerous inputs and assumptions used in our valuation techniques, including estimated average selling price, construction and development costs, absorption pace (reflecting any product mix change strategies implemented or to be implemented), selling strategies, alternative land uses (including

24



disposition of all or a portion of the land owned), or discount rates, which could materially impact future cash flow and fair value estimates.
As of December 31, 2019, our projections generally assume a gradual improvement in market conditions. If communities are not recoverable based on estimated future undiscounted cash flows, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. The fair value of a community is estimated by discounting management’s cash flow projections using an appropriate risk-adjusted interest rate. As of December 31, 2019, we utilized discount rates ranging from 13% to 16% in our valuations. The discount rate used in determining each asset’s estimated fair value reflects the inherent risks associated with the related estimated cash flow stream, as well as current risk-free rates available in the market and estimated market risk premiums.
Our quarterly assessments reflect management’s best estimates. Due to the inherent uncertainties in management’s estimates and uncertainties related to our operations and our industry as a whole as further discussed in “Item 1A. Risk Factors” in Part I of this Annual Report on Form 10-K, we are unable to determine at this time if and to what extent continuing future impairments will occur. Additionally, due to the volume of possible outcomes that can be generated from changes in the various model inputs for each community, we do not believe it is possible to create a sensitivity analysis that can provide meaningful information for the users of our financial statements.
Warranty Reserves. We record warranty reserves to cover our exposure to the costs for materials and labor not expected to be covered by our subcontractors to the extent they relate to warranty-type claims. Warranty reserves are established by charging cost of sales and crediting a warranty reserve for each home delivered.  The warranty reserves for the Company’s Home Builder’s Limited Warranty (“HBLW”) are established as a percentage of average sales price and adjusted based on historical payment patterns determined, generally, by geographic area and recent trends. Factors that are given consideration in determining the HBLW reserves include: (1) the historical range of amounts paid per average sales price on a home; (2) type and mix of amenity packages added to the home; (3) any warranty expenditures not considered to be normal and recurring; (4) timing of payments; (5) improvements in quality of construction expected to impact future warranty expenditures; and (6) conditions that may affect certain projects and require a different percentage of average sales price for those specific projects. Changes in estimates for warranties occur due to changes in the historical payment experience and differences between the actual payment pattern experienced during the period and the historical payment pattern used in our evaluation of the warranty reserve balance at the end of each quarter. Actual future warranty costs could differ from our current estimated amount.
Our warranty reserves for our 30-year (offered on all homes sold after April 25, 1998 and on or before December 1, 2015 in all of our markets except our Texas markets), 15-year (offered on all homes sold after December 1, 2015 in all of our markets except our Texas markets) and 10-year (offered on all homes sold in our Texas markets) transferable structural warranty programs are established on a per-unit basis. While the structural warranty reserve is recorded as each house is delivered, the sufficiency of the structural warranty per unit charge and total reserve is reevaluated on an annual basis, with the assistance of an actuary, using our own historical data and trends, as well as industry-wide historical data and trends, and other project specific factors. The reserves are also evaluated quarterly and adjusted if we encounter activity that is not consistent with the historical experience used in the annual analysis. These reserves are subject to variability due to uncertainties regarding structural defect claims for products we build, the markets in which we build, claim settlement history, insurance and legal interpretations, among other factors.
While we believe that our warranty reserves are sufficient to cover our projected costs, there can be no assurances that historical data and trends will accurately predict our actual warranty costs. See Note 1 and Note 8 to our Consolidated Financial Statements for additional information related to our warranty reserves.
RESULTS OF OPERATIONS
Overview
For the year ended December 31, 2019, we achieved record levels of new contracts, homes delivered, revenue and pre-tax income. The improved profitability is attributable primarily to the increase in homes delivered and improved overhead leverage. We also incurred lower acquisition-related expenses in 2019. Additionally, our complementary financial services business also achieved record revenue and a record number of loans originated in 2019. Fundamental housing market factors were favorable in 2019, including steady increases in employment, continued low mortgage rates, relatively high consumer confidence, and a limited supply of homes available for sale. Although we believe housing market conditions will remain relatively favorable during 2020, we also believe rising land and construction costs may continue to impose pressure on housing affordability in many of our markets.

25



Favorable market conditions along with the continued execution of our strategic business initiatives enabled us to achieve the following record results in 2019 in comparison to the year ended December 31, 2018:
New contracts increased 16% to 6,773 contracts - a record high for our Company
Homes delivered increased 9% to 6,296 homes - a record high for our Company
Total sales value in backlog increased 18% to $1,058 million - a year-end record for our Company
Revenue increased 9% to $2.50 billion - a record high for our Company
Income before income taxes increased 18% to $166.0 million - a record high for our Company
Number of active communities at December 31, 2019 increased 8% to 225 - an all-time record for our Company

In addition to the record results described above, our number of homes in backlog increased 22%, and our company-wide absorption pace of sales per community for 2019 was 2.6 per month compared to 2.4 per month in 2018.

In January 2020, we issued $400 million aggregate principal amount of 2028 Senior Notes for net proceeds of approximately $393.9 million. We used a portion of the net proceeds of this offering to redeem, at par, all $300.0 million aggregate principal amount of our outstanding 6.75% Senior Notes due 2021 (the “2021 Senior Notes”) and used the remaining proceeds to repay a portion of our outstanding borrowings under the Credit Facility (as defined below).

Summary of Company Financial Results in 2019
The calculations of adjusted income before income taxes, adjusted net income, and adjusted housing gross margin, each of which is a non-GAAP measure, are described and reconciled to income before income taxes, net income, and housing gross margin, respectively, which represent the most directly comparable financial measures calculated in accordance with GAAP, below under “Non-GAAP Financial Measures.”
Income before income taxes for the twelve months ended December 31, 2019 increased 18% from $141.3 million for the year ended December 31, 2018 to $166.0 million for the year ended December 31, 2019. Income before income taxes for 2019 was unfavorably impacted by $0.6 million of acquisition-related charges as a result of our acquisition of Pinnacle Homes in March 2018 and asset impairment charges of $5.0 million. Income before income taxes for 2018 was unfavorably impacted by $6.8 million of acquisition-related charges (which includes $5.1 million of charges related to purchase accounting adjustments and $1.7 million of acquisition and integration costs, both incurred as a result of our acquisition of Pinnacle Homes) and asset impairment charges of $5.8 million. Excluding these acquisition-related and impairment charges in both 2019 and 2018, adjusted income before income taxes increased 12% from $153.9 million in 2018 to $171.7 million in 2019.
In 2019, we achieved net income of $127.6 million, or $4.48 per diluted share compared to net income of $107.7 million, or $3.70 per diluted share in 2018, both of which include the after-tax impact of the acquisition-related charges and asset impairment charges noted above. Excluding these charges, adjusted net income increased 12% from $117.3 million in 2018 to $131.9 million in 2019.
In 2019, we recorded record total revenue of $2.50 billion, including $2.42 billion from homes delivered, $24.6 million from land sales, and $55.3 million from our financial services operations. Revenue from homes delivered increased 9% from 2018 driven primarily by the 518 additional homes delivered in 2019 (a 9% increase). Revenue from land sales increased $7.7 million from 2018 due primarily to more land sales in our Northern region in the current year compared to the prior year. Revenue from our financial services segment increased 6% to $55.3 million in 2019 as a result of an increase in the number of loan originations and an increase in the average loan amount, partially offset by lower margins on loans sold during the period than we experienced in 2018, primarily in the first quarter of 2019.
Total gross margin (total revenue less total land and housing costs) increased $45.7 million in 2019 compared to 2018 as a result of a $42.5 million improvement in the gross margin of our homebuilding operations and a $3.2 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 $44.1 million, due to the 9% increase in the number of homes delivered and a decline of $0.8 million in asset impairment charges. Our housing gross margin percentage improved 30 basis points from 17.6% in the prior year to 17.9% in 2019. Exclusive of the acquisition-related charges and asset impairment charges in 2019 and 2018, our adjusted housing gross margin percentage remained flat at 18.1% in both 2019 and 2018. Our gross margin on land sales (land gross margin) declined $1.5 million in 2019 compared to 2018 as a result of the mix of lots sold in the current year compared to the prior year. The gross margin of our financial services operations increased $3.2 million in 2019 compared to 2018 as a result of increases in the number of loan originations, the average loan amount and the volume of loans sold, partially offset by a decline in margins on loans sold, primarily in the first quarter of 2019.

26



We believe the increased sales volume in 2019 compared to 2018 was driven primarily by the opening of new communities which increased our average number of locations selling homes, along with the continued favorable economic conditions described above, limited supply of homes available for sale, better pricing leverage in select locations and submarkets, and shifts in both product and community mix. We opened 80 new communities during 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 and type of home offered varies from year to year. As a result, our new contracts, average closing price and housing gross margin may fluctuate up or down from year to year depending on the mix of communities delivering homes. The improvements described above were partially offset by higher average lot and construction costs related to homebuilding industry conditions and normal supply and demand dynamics.
For 2019, selling, general and administrative expense increased $21.7 million, which partially offset the increase in our gross margin discussed above, but declined as a percentage of revenue to 12.1% in 2019 compared to 12.3% in 2018. Selling expense increased $11.5 million from 2018 and remained flat as a percentage of revenue at 6.2% in both 2019 and 2018. Variable selling expense for sales commissions contributed $7.8 million to the increase due to the higher number of homes delivered. The increase in selling expense was also attributable to a $3.7 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 $10.2 million compared to 2018 but declined as a percentage of revenue from 6.0% in 2018 to 5.9% in 2019. The dollar increase in general and administrative expense was primarily due to a $7.2 million increase in compensation-related expenses primarily due to our increased headcount and improved performance, a $1.8 million increase in land related expenses due to our increased average community count, a $0.8 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 2019, housing market conditions were favorable, as interest rates moderated, with particularly strong sales in the second half of the year. We believe the general economic backdrop, with low unemployment, higher wages and high consumer confidence along with relatively low mortgage rates and low home inventory levels, provided a catalyst for increased demand for new homes. We believe these conditions and the associated level of housing demand will continue into 2020. The housing industry also continued to experience a modest shift to more affordable homes in 2019, which we responded to through additional investment in our more affordable Smart Series product. We remain sensitive to changes in market conditions, and continue to focus on increasing our profitability by generating additional revenue, expanding our market share, shifting our product mix to include more affordable designs, and investing in attractive land opportunities to increase our number of active communities.

We expect to continue to emphasize the following strategic business objectives in 2020:
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 several actions in 2019 intended to continue the improvement in our financial and operating results in 2020 and beyond, including investing $332.1 million in land acquisitions and $268.3 million in land development to grow our presence in our existing markets. We currently estimate that we will spend approximately $650 million to $700 million on land purchases and land development in 2020. However, land transactions are subject to a number of factors, including our financial condition and market conditions, as well as the 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 ended 2019 with approximately 33,300 lots under control, which represents a 5.3 year supply of lots based on 2019 homes delivered, including certain lots that we anticipate selling to third parties. This represents a 16% increase from our approximately 28,700 lots under control at the end of 2018. We also opened 80 communities and closed 64 communities in 2019, ending the year with a total of 225 communities. Of our total communities, 61 offered our more affordable Smart Series designs, which are primarily designed for first-time homebuyers. We estimate that our average community count in 2020 will increase by about 5% from our average community count of 218 communities in 2019.
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.

27



Segment Reporting
During 2019, we decided to wind down our Washington, D.C. operations, which was substantially completed by December 31, 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 operating segments (and our remaining Washington, D.C. operations, which were immaterial as of December 31, 2019) into our existing Southern region based on the aggregation criteria described in ASC 280. 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 Consolidated Balance Sheets, Statement of Income or Statement of Cash Flows for the periods presented. See Note 15 to our Consolidated Financial Statements for further information on the Company’s application of ASC 280.
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

28



The following table shows, by segment: revenue; gross margin; selling, general and administrative expense; operating income (loss); interest expense; and depreciation and amortization for the years ended December 31, 2019, 2018 and 2017:
 
Year Ended
(In thousands)
2019
 
2018
 
2017
Revenue:
 
 
 
 
 
Northern homebuilding
$
1,027,291

 
$
933,119

 
$
742,577

Southern homebuilding
1,417,676

 
1,300,967

 
1,169,701

Financial services (a)
55,323

 
52,196

 
49,693

Total revenue
$
2,500,290

 
$
2,286,282

 
$
1,961,971

 
 
 
 
 
 
Gross margin:
 
 
 
 
 
Northern homebuilding (b)
$
182,887

 
$
165,187

 
$
149,080

Southern homebuilding (c)
251,217

 
226,386

 
194,495

Financial services (a)
55,323

 
52,196

 
49,693

Total gross margin (b) (c) (d)
$
489,427

 
$
443,769

 
$
393,268

 
 
 
 
 
 
Selling, general and administrative expense:
 
 
 
 
 
Northern homebuilding
$
86,648

 
$
79,056

 
$
67,558

Southern homebuilding
136,135

 
130,474

 
122,099

Financial services (a)
27,973

 
24,714

 
22,405

Corporate
51,582

 
46,364

 
42,547

Total selling, general and administrative expense
$
302,338

 
$
280,608

 
$
254,609

 
 
 
 
 
 
Operating income (loss):
 
 
 
 
 
Northern homebuilding (b)
$
96,239

 
$
86,131

 
$
81,522

Southern homebuilding (c)
115,082

 
95,912

 
72,396

Financial services (a)
27,350

 
27,482

 
27,288

Less: Corporate selling, general and administrative expense
(51,582
)
 
(46,364
)
 
(42,547
)
Total operating income (b) (c) (d)
$
187,089

 
$
163,161

 
$
138,659

 
 
 
 
 
 
Interest expense:
 
 
 
 
 
Northern homebuilding
$
7,474

 
$
7,142

 
$
5,010

Southern homebuilding
10,250

 
10,073

 
11,107

Financial services (a)
3,651

 
3,269

 
2,757

Total interest expense
$
21,375

 
$
20,484

 
$
18,874

 
 
 
 
 
 
Equity in income from joint venture arrangements
$
(311
)
 
$
(312
)
 
$
(539
)
Acquisition and integration costs (e)

 
1,700

 

 
 
 
 
 
 
Income before income taxes
$
166,025

 
$
141,289

 
$
120,324

 
 
 
 
 
 
Depreciation and amortization:
 

 
 

 
 

Northern homebuilding
$
2,944

 
$
2,448

 
$
2,069

Southern homebuilding
4,778

 
4,472

 
4,579

Financial services
2,095

 
1,281

 
1,503

Corporate
6,133

 
6,330

 
6,023

Total depreciation and amortization
$
15,950

 
$
14,531

 
$
14,174

(a)
Our financial services operational results should be viewed in connection with our homebuilding business as its operations originate loans and provide title services primarily for our homebuying customers, with the exception of a small amount of mortgage refinancing.
(b)
Includes $0.6 million and $5.1 million of acquisition-related charges taken during 2019 and 2018, respectively, as a result of our acquisition of Pinnacle Homes in Detroit, Michigan on March 1, 2018.
(c)
The year ended December 31, 2017 includes an $8.5 million charge for stucco-related repair costs in certain of our Florida communities (as more fully discussed below and in Note 8 to our Consolidated Financial Statements).
(d)
For the years ended December 31, 2019, 2018 and 2017, total gross margin and total operating income were reduced by $5.0 million, $5.8 million and $7.7 million, respectively, related to asset impairment charges taken during the period.
(e)
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.

29



The following tables show total assets by segment at December 31, 2019, 2018 and 2017:
 
At December 31, 2019
(In thousands)
Northern
 
Southern
 
Corporate, Financial Services and Unallocated
 
Total
Deposits on real estate under option or contract
$
3,655

 
$
24,877

 
$

 
$
28,532

Inventory (a)
783,972

 
957,003

 

 
1,740,975

Investments in joint venture arrangements
1,672

 
36,213

 

 
37,885

Other assets (e)
21,564

 
52,662

(b) 
223,976

 
298,202

Total assets
$
810,863

 
$
1,070,755

 
$
223,976

 
$
2,105,594

 
At December 31, 2018
(In thousands)
Northern
 
Southern
 
Corporate, Financial Services and Unallocated
 
Total
Deposits on real estate under option or contract
$
5,725

 
$
27,937

 
$

 
$
33,662

Inventory (a)
696,057

 
944,741

 

 
1,640,798

Investments in joint venture arrangements
1,562

 
34,308

 

 
35,870

Other assets
19,524

 
43,086

(b) 
248,641

(c) (d) 
311,251

Total assets
$
722,868

 
$
1,050,072

 
$
248,641

 
$
2,021,581

 
At December 31, 2017
(In thousands)
Northern
 
Southern
 
Corporate, Financial Services and Unallocated
 
Total
Deposits on real estate under option or contract
$
4,933

 
$
27,623

 
$

 
$
32,556

Inventory (a)
500,671

 
881,347

 

 
1,382,018

Investments in unconsolidated joint ventures
4,410

 
16,115

 

 
20,525

Other assets
13,573

 
52,095

(b) 
364,004

 
429,672

Total assets
$
523,587

 
$
977,180

 
$
364,004

 
$
1,864,771

(a)
Inventory includes: single-family lots, land and land development costs; land held for sale; homes under construction; model homes and furnishings; community development district infrastructure; and consolidated inventory not owned.
(b)
Includes development reimbursements from local municipalities.
(c)
Includes asset held for sale for $5.6 million.
(d)
The decrease in Corporate, Financial Services, and Unallocated other assets from 2017 is related to an increase in cash on hand at the end of 2017 due primarily to the issuance of our $250.0 million aggregate principal amount of 2025 Senior Notes during the year ended December 31, 2017.
(e)
Includes $18.4 million of operating lease right-of-use assets recorded as a result of the adoption of ASU 2016-02 on January 1, 2019. See Note 9 to our Consolidated Financial Statements for further information.


30



Reportable Segments
The following table presents, by reportable segment, selected operating and financial information as of and for the years ended December 31, 2019, 2018 and 2017:
 
Year Ended December 31,
(Dollars in thousands)
2019
 
2018
 
2017
Northern Region
 
 
 
 
 
Homes delivered
2,482

 
2,317

 
1,907

New contracts, net
2,695

 
2,306

 
1,978

Backlog at end of period
1,143

 
930

 
828

Average sales price of homes delivered
$
411

 
$
402

 
$
387

Average sales price of homes in backlog
$
433

 
$
441

 
$
415

Aggregate sales value of homes in backlog
$
494,961

 
$
410,434

 
$
343,660

Housing revenue
$
1,020,362

 
$
932,248

 
$
738,743

Land sale revenue
$
6,929

 
$
871

 
$
3,834

Operating income homes (a) (b)
$
96,108

 
$
85,747

 
$
80,762

Operating income land
$
131

 
$
384

 
$
760

Number of average active communities
91

 
84

 
64

Number of active communities, end of period
96

 
90

 
69

Southern Region
 
 
 
 
 
Homes delivered
3,814

 
3,461

 
3,182

New contracts, net
4,078

 
3,539

 
3,321

Backlog at end of period
1,528

 
1,264

 
1,186

Average sales price of homes delivered
$
367

 
$
371

 
$
358

Average sales price of homes in backlog
$
368

 
$
385

 
$
377

Aggregate sales value of homes in backlog
$
562,567

 
$
486,280

 
$
447,593

Housing revenue
$
1,399,986

 
$
1,284,949

 
$
1,139,829

Land sale revenue
$
17,690

 
$
16,018

 
$
29,872

Operating income homes (a) (c)
$
114,715

 
$
94,251

 
$
70,307

Operating income land
$
367

 
$
1,661

 
$
2,089

Number of average active communities
127

 
121

 
119

Number of active communities, end of period
129

 
119

 
119

Total Homebuilding Regions
 
 
 
 
 
Homes delivered
6,296

 
5,778

 
5,089

New contracts, net
6,773

 
5,845

 
5,299

Backlog at end of period
2,671

 
2,194

 
2,014

Average sales price of homes delivered
$
384

 
$
384

 
$
369

Average sales price of homes in backlog
$
396

 
$
409

 
$
393

Aggregate sales value of homes in backlog
$
1,057,528

 
$
896,714

 
$
791,253

Housing revenue
$
2,420,348

 
$
2,217,197

 
$
1,878,572

Land sale revenue
$
24,619

 
$
16,889

 
$
33,706

Operating income homes (a) (b) (c) (d)
$
210,823

 
$
179,998

 
$
151,069

Operating income land
$
498

 
$
2,045

 
$
2,849

Number of average active communities
218

 
205

 
183

Number of active communities, end of period
225

 
209

 
188

(a)
Includes the effect of total homebuilding selling, general and administrative expense for the region as disclosed in the first table set forth in this “Outlook” section.
(b)
Includes $0.6 million and $5.1 million of acquisition-related charges taken during 2019 and 2018, respectively, as a result of our acquisition of Pinnacle Homes in Detroit, Michigan on March 1, 2018.
(c)
Includes an $8.5 million charge for stucco-related repair costs in certain of our Florida communities (as more fully discussed below and in Note 8 to our Consolidated Financial Statements) taken during 2017.
(d)
Includes $5.0 million, $5.8 million and $7.7 million of asset impairment charges taken during the years ended December 31, 2019, 2018 and 2017, respectively.
 
Year Ended December 31,
(Dollars in thousands)
2019
 
2018
 
2017
Financial Services
 
 
 
 
 
Number of loans originated
4,476

 
3,964

 
3,632

Value of loans originated
$
1,382,695

 
$
1,200,474

 
$
1,078,520

 
 
 
 
 
 
Revenue
$
55,323

 
$
52,196

 
$
49,693

Less: Selling, general and administrative expenses
27,973

 
24,714

 
22,405

Less: Interest expense
3,651

 
3,269

 
2,757

Income before income taxes
$
23,699

 
$
24,213

 
$
24,531

 
 
 
 
 
 

31



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
The following table sets forth the cancellation rates for each of our homebuilding segments for the years ended December 31, 2019, 2018 and 2017:
 
Year Ended December 31,
 
2019
 
2018
 
2017
Northern
10.9
%
 
13.6
%
 
12.0
%
Southern
14.3
%
 
15.2
%
 
14.8
%
Total cancellation rate
13.0
%
 
14.6
%
 
13.8
%


32



Non-GAAP Financial Measures
This report contains information about our adjusted housing gross margin, adjusted income before income taxes, and adjusted net income available to common shareholders, each of which constitutes a non-GAAP financial measure. Because adjusted housing gross margin, adjusted income before income taxes, and adjusted net income available to common shareholders 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.
Adjusted housing gross margin, adjusted income before income taxes, and adjusted net income available to common shareholders are calculated as follows:
 
 
Year Ended December 31,
(Dollars in thousands)
 
2019
 
2018
 
2017
Housing revenue
 
$
2,420,348

 
$
2,217,197

 
$
1,878,572

Housing cost of sales
 
1,986,743

 
1,827,669

 
1,537,846

 
 
 
 
 
 
 
Housing gross margin
 
433,605

 
389,528

 
340,726

Add: Stucco-related charges (a)
 

 

 
8,500

Add: Impairment (b)
 
5,002

 
5,809

 
7,681

Add: Acquisition-related charges (c)
 
639

 
5,147

 

 
 
 
 
 
 
 
Adjusted housing gross margin
 
$
439,246

 
$
400,484

 
$
356,907

 
 
 
 
 
 
 
Housing gross margin percentage
 
17.9
%
 
17.6
%
 
18.1
%
Adjusted housing gross margin percentage
 
18.1
%
 
18.1
%
 
19.0
%
 
 
 
 
 
 
 
Income before income taxes
 
$
166,025

 
$
141,289

 
$
120,324

Add: Stucco-related charges (a)
 

 

 
8,500

Add: Impairment (b)
 
5,002

 
5,809

 
7,681

Add: Acquisition-related charges (c)
 
639

 
5,147

 

Add: Acquisition and integration costs (d)
 

 
1,700

 

 
 
 
 
 
 
 
Adjusted income before income taxes
 
$
171,666

 
$
153,945

 
$
136,505

 
 
 
 
 
 
 
Net income available to common shareholders
 
$
127,587

 
$
107,663

 
$
66,168

Add: Stucco-related charges - net of tax (a)
 

 

 
5,440

Add: Impairment - net of tax (b)
 
3,802

 
4,415

 
4,916

Add: Acquisition-related charges - net of tax (c)
 
486

 
3,912

 

Add: Acquisition and integration costs - net of tax (d)
 

 
1,292

 

Add: Excess of fair value over book value of preferred shares redeemed (e)
 

 

 
2,257

Add: Deferred tax asset re-measurement as a result of 2017 Tax Act (f)
 

 

 
6,520

 
 
 
 
 
 
 
Adjusted net income available to common shareholders
 
$
131,875

 
$
117,282

 
$
85,301

 
 
 
 
 
 
 
(a)
Represents warranty charges for stucco-related repair costs in certain of our Florida communities (as more fully discussed in Note 8 to our Consolidated Financial Statements).
(b)
Represents asset impairment charges taken during the respective periods.
(c)
Represents acquisition-related charges related to our acquisition of Pinnacle Homes in Detroit, Michigan on March 1, 2018 (as more fully discussed in Note 12 to our Consolidated Financial Statements).
(d)
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.
(e)
Represents the equity charge related to the excess of fair value over carrying value related to the original issuance costs that were paid in 2007 on our Series A Preferred Shares that were redeemed during the fourth quarter of 2017 (as more fully discussed in Note 13 to our Consolidated Financial Statements).
(f)
Represents the impact of the deferred tax asset re-measurement as a result of the 2017 Tax Act passed during the fourth quarter of 2017.
We believe adjusted housing gross margin, adjusted income before income taxes, and adjusted net income available to common shareholders 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 available to common shareholders we generated specifically on our operations during a given period. These non-GAAP financial measures isolate the impact that the acquisition-related charges, stucco-related charges and impairment charges have on housing gross margins; the impact that the acquisition-related charges,

33



acquisition and integration costs, stucco-related charges and impairment charges have on income before income taxes; and that the acquisition-related charges and integration costs, stucco-related charges, impairment charges, equity adjustment, and deferred tax asset re-measurement charge have on net income available to common shareholders, and allow investors to make comparisons with our competitors that adjust housing gross margins, income before income taxes, and net income available to common shareholders 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 Comparisons
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
The calculation of adjusted housing gross margin (referred to below) 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 twelve months ended December 31, 2019, homebuilding revenue in our Northern region increased $94.2 million, from $933.1 million in 2018 to $1,027.3 million in 2019. This 10% increase in homebuilding revenue was the result of a 7% increase in the number of homes delivered (165 units), a 2% increase in the average sales price of homes delivered ($9,000 per home delivered), and a $6.1 million increase in land sale revenue. Operating income in our Northern region increased $10.1 million, from $86.1 million in 2018 to $96.2 million in 2019. The increase in operating income was primarily the result of a $17.7 million increase in our gross margin, offset, in part, by a $7.5 million increase in selling, general, and administrative expense. With respect to our homebuilding gross margin, our housing gross margin improved $18.0 million, due to the 7% increase in the number of homes delivered and the 2% increase in the average sales price of homes delivered noted above. Our housing gross margin percentage improved 20 basis points from 17.7% in 2018 to 17.9% in 2019. Our housing gross margin in both 2019 and 2018 was unfavorably impacted by $0.6 million and $5.1 million, respectively, of acquisition-related charges from our Detroit acquisition and $3.4 million and $0.3 million in asset impairment charges, respectively. Exclusive of these charges in both years, our adjusted housing gross margin percentage in 2019 improved from 18.26% in 2018 to 18.31% in 2019 largely due to a change in product type and market mix of homes delivered compared to prior year, offset, in part, by increased lot and construction costs. Our land sale gross margin declined $0.3 million in the twelve months ended December 31, 2019 compared to the same period in 2018 as a result of the mix of lots sold in the current year compared to the prior year.
Selling, general and administrative expense increased $7.5 million, from $79.1 million in 2018 to $86.6 million in 2019, but declined as a percentage of revenue to 8.4% in 2019 compared to 8.5% in 2018. The increase in selling, general and administrative expense was attributable, in part, to a $5.6 million increase in selling expense, due to (1) a $2.5 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, $1.0 million of which was associated with our Detroit division, and (2) a $3.1 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. The increase in selling, general and administrative expense was also attributable to a $1.9 million increase in general and administrative expense, which was primarily related to a $0.9 million increase in land-related expenses, a $0.3 million increase in professional fees, and a $0.7 million increase in miscellaneous other expenses.
During 2019, we experienced a 17% increase in new contracts in our Northern region, from 2,306 in 2018 to 2,695 in 2019, and a 23% increase in backlog from 930 homes at December 31, 2018 to 1,143 homes at December 31, 2019. The increases in new contracts and backlog were attributable to (1) improved demand in our Smart Series communities compared to the prior year and (2) an increase in our average number of communities during the period. Average sales price in backlog decreased to $433,000 at December 31, 2019 compared to $441,000 at December 31, 2018 which was primarily due to product type and market mix in 2019 compared to prior year. During the twelve months ended December 31, 2019, we opened 28 new communities in our Northern region compared to 26 during 2018. Our monthly absorption rate in our Northern region improved to 2.5 per community in 2019, compared to 2.3 per community in 2018.
Southern Region. For the twelve months ended December 31, 2019, homebuilding revenue in our Southern region increased $116.7 million, from $1,301.0 million in 2018 to $1,417.7 million in 2019. This 9% increase in homebuilding revenue was primarily the result of a 10% increase in the number of homes delivered (353 units) and a $1.7 million increase in land sale revenue, partially offset by a 1% decrease in the average sales price of homes delivered ($4,000 per home delivered). Operating income in our Southern region increased $19.2 million from $95.9 million in 2018 to $115.1 million in 2019. This increase in operating income was the result of a $24.8 million improvement in our gross margin, offset, in part, by a $5.6 million increase in selling, general, and administrative expense. With respect to our homebuilding gross margin, our gross margin on homes delivered improved $26.1 million, due primarily to the 10% increase in the number of homes delivered noted above and the $3.9 million decline in

34



pre-tax impairment charges recorded in 2019 compared to prior year. Our housing gross margin percentage improved 40 basis points from 17.5% in 2018 to 17.9% in 2019. Exclusive of the impairment charges in both 2019 and 2018, our adjusted housing gross margin percentage improved 10 basis points from 17.9% in 2018 to 18.0% in 2019 largely due to the mix of communities delivering homes and a more favorable product mix, offset, in part, by rising lot and construction costs. Our land sale gross margin declined $1.3 million as a result of the mix of lots sold in the current year compared to the prior year.
Selling, general and administrative expense increased $5.6 million from $130.5 million in 2018 to $136.1 million in 2019 but declined as a percentage of revenue to 9.6% in 2019 from 10.0% in 2018. The increase in selling, general and administrative expense was attributable, in part, to a $6.0 million increase in selling expense due to (1) a $5.3 million increase in variable selling expenses resulting from increases in sales commissions produced by the higher number of homes delivered, and (2) a $0.7 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, general and administrative expense was partially offset by a $0.4 million decrease in general and administrative expense, which was primarily related to a decrease in professional fees, partially offset by an increase in incentive compensation expense related to improved operating results.
During 2019, we experienced a 15% increase in new contracts in our Southern region, from 3,539 in 2018 to 4,078 in 2019, and a 21% increase in backlog from 1,264 homes at December 31, 2018 to 1,528 homes at December 31, 2019. The increases in new contracts and backlog were primarily due to changes in product type and market mix as well as due to an increase in our average number of communities during the period, along with improvement in demand across our Southern markets compared to prior year. Average sales price in backlog decreased to $368,000 at December 31, 2019 from $385,000 at December 31, 2018 primarily due to a change in product type and market mix due to an increase of our more affordable Smart Series homes sold. During 2019, we opened 52 communities in our Southern region compared to 41 in 2018. Our monthly absorption rate in our Southern region improved to 2.7 per community in 2019 from 2.4 per community in 2018.
Financial Services. Revenue from our mortgage and title operations increased $3.1 million, or 6%, from $52.2 million for the twelve months ended December 31, 2018 to a record $55.3 million for the twelve months ended December 31, 2019 as a result of a 13% increase in the number of loan originations, from 3,964 in 2018 to 4,476 in 2019, and an increase in the average loan amount from $303,000 in 2018 to $309,000 in 2019, partially offset by lower margins on loans sold during the period than we experienced in 2018, primarily in the first quarter of 2019.
Our financial service operations ended 2019 with a $0.1 million decrease in operating income compared to 2018, which was primarily due to the $3.3 million increase in selling, general and administrative expense compared to 2018 partially offset by the increase in our revenue discussed above. The increase in selling, general and administrative expense was attributable to an increase in compensation expense related to our increase in employee headcount along with costs associated with opening new mortgage and title offices in certain markets.
At December 31, 2019, M/I Financial provided financing services in all of our markets. Approximately 82% of our homes delivered during 2019 were financed through M/I Financial, compared to 80% during 2018. Capture rate is influenced by financing availability and can fluctuate from quarter to quarter.
Corporate Selling, General and Administrative Expenses. Corporate selling, general and administrative expense increased $5.2 million, from $46.4 million in 2018 to $51.6 million in 2019. The increase was primarily due to a $4.2 million increase in compensation expense, a $0.5 million increase related to costs associated with new information systems, a $0.3 million increase in charitable contributions, and a $0.2 million increase in other miscellaneous expenses.
Acquisition and Integration Costs. During 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. No such costs were incurred in 2019.
Equity in income from joint venture arrangements. Equity in income from joint venture arrangements represents our portion of pre-tax earnings from our joint venture arrangements where a special purpose entity is established (“LLCs”) with the other partners. In both 2019 and 2018, the Company earned $0.3 million in equity income from its LLCs.
Interest Expense - Net. Interest expense for the Company increased $0.9 million from $20.5 million in the twelve months ended December 31, 2018 to $21.4 million in the twelve months ended December 31, 2019. This increase was primarily the result of an increase in our weighted average borrowings from $801.0 million in 2018 to $842.4 million in 2019 due to increased borrowings under our Credit Facility (as defined below) during 2019 compared to 2018, offset, in part, by a decrease in our weighted average

35



interest rate from 6.22% in 2018 to 6.17% in the 2019 as well as higher capitalized interest related to our increased land development and home construction during 2019 compared to prior year.
Income Taxes. Our overall effective tax rate was 23.2% for the year ended December 31, 2019 and 23.8% for the year ended December 31, 2018. The decline in the effective rate for the twelve months ended December 31, 2019 was primarily attributable to an increased tax benefit from equity compensation (see Note 14 to our Consolidated Financial Statements for more information).
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 each of our reportable segments is calculated as follows:
 
Year Ended December 31,
(Dollars in thousands)
2019
 
2018
 
2017
 
 
 
 
 
 
Northern region:
 
 
 
 
 
Housing revenue
$
1,020,362

 
$
932,248

 
$
738,743

Housing cost of sales
837,606

 
767,445

 
590,423

 
 
 
 
 
 
Housing gross margin
182,756

 
164,803

 
148,320

Add: Impairment (a)
3,395

 
273

 

Add: Acquisition-related charges (b)
639

 
5,147

 

 
 
 
 
 
 
Adjusted housing gross margin
$
186,790

 
$
170,223

 
$
148,320

 
 
 
 
 
 
Housing gross margin percentage
17.9
%
 
17.7
%
 
20.1
%
Adjusted housing gross margin percentage
18.3
%
 
18.3
%
 
20.1
%
 
 
 
 
 
 
Southern region:
 
 
 
 
 
Housing revenue
$
1,399,986

 
$
1,284,949

 
$
1,139,829

Housing cost of sales
1,149,137

 
1,060,224

 
947,423

 
 
 
 
 
 
Housing gross margin
250,849

 
224,725

 
192,406

Add: Impairment (a)
1,607

 
5,536

 
7,681

Add: Stucco-related charges (c)

 

 
8,500

 
 
 
 
 
 
Adjusted housing gross margin
$
252,456

 
$
230,261

 
$
208,587

 
 
 
 
 
 
Housing gross margin percentage
17.9
%
 
17.5
%
 
16.9
%
Adjusted housing gross margin percentage
18.0
%
 
17.9
%
 
18.3
%
(a)
Represents asset impairment charges taken during the respective periods.
(b)
Represents acquisition-related charges from our acquisition of Pinnacle Homes in Detroit, Michigan on March 1, 2018.
(c)
Represents warranty charges for stucco-related repair costs in certain of our Florida communities taken during 2017. With respect to this matter, during 2019, we identified 116 additional homes in need of repair and completed repairs on 139 homes, and at December 31, 2019, we have 136 homes in various stages of repair. See Note 8