Stock Based Compensation

12 Months Ended

Dec. 31, 2019

Share-based Payment Arrangement [Text Block]

Stock-Based and Deferred Compensation

We measure and recognize compensation expense associated with our grant of equity-based awards in accordance with ASC 718, Compensation-Stock Compensation (“ASC 718”), which generally requires that companies measure and recognize stock-based compensation expense in an amount equal to the fair value of share-based awards granted under compensation arrangements over the related vesting period. We have granted share-based awards to certain of our employees and directors in the form of stock options, director stock units and performance share units (“PSU’s”). Determining the fair value of share-based awards requires judgment to identify the appropriate valuation model and develop the assumptions.

Stock Incentive Plans

The Company maintains the M/I Homes, Inc. 2018 Long-Term Incentive Plan (the “2018 LTIP”), an equity compensation plan administered by the Compensation Committee of our Board of Directors. Under the 2018 LTIP, the Company is permitted to grant (1) nonqualified stock options to purchase common shares, (2) incentive stock options to purchase common shares, (3) stock appreciation rights, (4) restricted common shares, (5) other stock-based awards – awards that are valued in whole or in part by reference to, or otherwise based on, the fair market value of our common shares, and (6) cash-based awards to its officers, employees, non-employee directors and other eligible participants. Subject to certain adjustments, the 2018 LTIP authorizes awards to officers, employees, non-employee directors and other eligible participants for up to 2,250,000 common shares, of which 1,714,293 remain available for grant at December 31, 2019.

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

Stock Options

Stock options are granted at the market price of the Company’s common shares at the close of business on the date of grant. The grant date fair value for stock option awards is estimated using the Black-Scholes option pricing model. Options awarded generally vest 20% annually over five years and expire after ten years. We recognize stock-based compensation expense for our stock option awards over the requisite service period of the award. Under the 2018 LTIP and the 2009 LTIP, in the case of termination due to death, disability or retirement, all options will become immediately exercisable. Shares issued upon option exercise may consist of treasury shares, authorized but unissued common shares or common shares purchased by or on behalf of the Company in the open market.

Following is a summary of stock option activity for the year ended December 31, 2019, relating to the stock options awarded under the 2018 LTIP and the 2009 LTIP:



	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value^(a) (In thousands)
Options outstanding at December 31, 2018	2,212,690		$	22.82	6.58	$	3,123
Granted	423,500		27.99
Exercised	(954,370	)	20.60
Forfeited	(58,100	)	27.37
Options outstanding at December 31, 2019	1,623,720		$	25.30	7.22	$	22,836
Options vested or expected to vest at December 31, 2019	1,571,685		$	25.25	7.19	$	22,198
Options exercisable at December 31, 2019	741,520		$	22.90	5.97	$	12,198

(a)Intrinsic value is defined as the amount by which the fair value of the underlying common shares exceeds the exercise price of the option.

The aggregate intrinsic value of options exercised during the years ended December 31, 2019, 2018 and 2017 was $14.5 million, $0.6 million and $9.3 million, respectively.

The fair value of our five-year service-based stock options granted during the years ended December 31, 2019, 2018 and 2017 was established at the date of grant using the Black-Scholes pricing model, with the weighted average assumptions as follows:



	Year Ended December 31,
	2019			2018			2017
Risk-free interest rate	2.51		%	2.72		%	1.96		%
Expected volatility	28.81		%	32.01		%	39.49		%
Expected term (in years)	5.9			5.7			5.9
Weighted average grant date fair value of options granted during the period	$	9.06		$	11.31		$	9.45

The risk-free interest rate is based upon the U.S. Treasury constant maturity rate at the date of the grant. Expected volatility is based on an average of (1) historical volatility of the Company’s stock and (2) implied volatility from traded options on the Company’s stock. The risk-free rate for periods within the contractual life of the stock option award is based on the yield curve of a zero-coupon U.S. Treasury bond on the date the stock option award is granted, with a maturity equal to the expected term of the stock option award granted. The Company uses historical data to estimate stock option exercises and forfeitures within its valuation model. The expected life of stock option awards granted is derived from historical exercise experience under the Company’s share-based payment plans, and represents the period of time that stock option awards granted are expected to be outstanding.

Total stock-based compensation expense related to stock option awards that has been charged against income was $3.6 million for the year ended December 31, 2019 relating to the 2018 LTIP and the 2009 LTIP, and $3.9 million, and $3.7 million for the years ended December 31, 2018 and 2017, respectively, relating to the 2018 LTIP, the 2009 LTIP, and the 1993 Stock Incentive Plan as Amended. As of December 31, 2019, there was a total of $7.8 million of unrecognized compensation expense related to unvested stock option awards that will be recognized as stock-based compensation expense as the awards vest over a weighted average period of 2.1 years for the service awards.

Director Stock Units

The Company awarded its non-employee directors a total of 24,000 and 21,000 stock units under the 2018 LTIP during the years ended December 31, 2019 and 2018, respectively, and a total of 18,000 stock units under the 2009 LTIP during the year ended December 31, 2017. Each stock unit is the equivalent of one common share, vests immediately and will be converted into a common share upon termination of service as a director. The grant date fair value for the director stock units is based upon the closing price of our common shares on the date of grant. Stock-based compensation expense for our director stock units, which vest immediately, is fully recognized in the period of the award. The Company recognized the stock-based compensation expense related to the awards of $0.7 million in both 2019 and 2018, and $0.5 million in 2017.

On May 5, 2009, the Company’s board of directors terminated the M/I Homes, Inc. 2006 Director Equity Incentive Plan (the “Director Equity Plan”). Awards outstanding under the Director Equity Plan remain in effect in accordance with their respective terms. At December 31, 2019, there were 8,059 stock units outstanding under the Director Equity Plan with a value of $0.2 million.

Performance Share Unit Awards

On February 19, 2019, February 15, 2018 and February 8, 2017, the Company awarded its executive officers (in the aggregate) a target number of PSU’s under the 2009 LTIP equal to 53,692, 46,444 and 57,110 PSU’s, respectively. Each PSU represents a contingent right to receive one common share of the Company if vesting is satisfied at the end of a three-year performance period (the “Performance Period”) based on the related performance conditions and markets conditions. The ultimate number of PSU’s that will vest and be earned, if any, after the completion of the Performance Period, is based on (1) (a) the Company’s cumulative annual pre-tax income from operations, excluding extraordinary items as defined in the underlying award agreements with the executive officers, over the Performance Period (weighted 80%) (the “Performance Condition”), and (b) the Company’s relative total shareholder return over the Performance Period compared to the total shareholder return of a peer group of other publicly-traded homebuilders (weighted 20%) (the “Market Condition”) and (2) the participant’s continued employment through the end of the Performance Period, except in the case of termination due to death, disability or retirement or involuntary termination without cause by the Company. The number of PSU’s that vest may increase by up to 50% from the target number based on levels of achievement of the above criteria as set forth in the applicable award agreements and decrease to zero if the Company fails to meet the minimum performance levels for both of the above criteria. If the Company achieves the minimum performance levels for both of the above criteria, 50% of the target number of PSU’s will vest and be earned. Any portion of PSU’s that does not vest at the end of the Performance Period will be forfeited. Additionally, the PSU’s have no dividend or voting rights during the Performance Period.

The grant date fair value for PSU’s with a market condition (as defined in ASC 718) is estimated using the Monte Carlo simulation methodology, and the grant date fair value for PSU’s with a performance condition (as defined in ASC 718) is based upon the closing price of our common shares on the date of grant. The grant date fair value of the portion of the PSU’s subject to the Performance Condition and the Market Condition component was $27.62 and $32.52, respectively, for the 2019 PSU’s, $31.93 and $33.57, respectively, for the 2018 PSU’s, and $23.34 and $19.69, respectively, for the 2017 PSU’s. In accordance with ASC 718, for the portion of the PSU’s subject to a Market Condition, stock-based compensation expense is derived using the Monte Carlo simulation methodology and is recognized ratably over the service period regardless of whether or not the attainment of the Market Condition is probable. Therefore, the Company recognized $0.2 million in stock-based compensation expense during 2019 related to the Market Condition portion of the 2019, 2018 and 2017 PSU awards. There was a total of $0.2 million of unrecognized stock-based compensation expense related to the Market Condition portion of the 2019 and 2018 PSU awards as of December 31, 2019. At December 31, 2019, the Market Condition for the 2017 PSU awards was met, and the Company recorded $0.1 million of stock-based compensation expense. Based on these results and board approval, 11,101 PSU’s vested during the first quarter of 2020 with respect to the portion of the 2017 PSU’s subject to the Market Condition.

For the portion of the PSU’s subject to a Performance Condition, we recognize stock-based compensation expense on a straight-line basis over the Performance Period based on the probable outcome of the related Performance Condition. If satisfaction of the performance condition is not probable, stock-based compensation expense recognition is deferred until probability is attained and a cumulative compensation expense adjustment is recorded and recognized ratably over the remaining service period. The Company reassesses the probability of the satisfaction of the Performance Condition on a quarterly basis, and stock-based compensation expense is adjusted based on the portion of the requisite service period that has passed. If actual results differ significantly from these estimates, stock-based compensation expense could be higher and have a material impact on our consolidated financial statements.

As of December 31, 2019, the Company had not recognized any stock-based compensation expense related to the Performance Condition portion of the 2019 PSU awards. If the Company achieves the minimum performance levels for the Performance Condition to be met for the 2019 PSU awards, the Company would record unrecognized stock-based compensation expense of $0.6 million as of December 31, 2019, for which $0.2 million would be immediately recognized as if attainment been probable at December 31, 2019. The Company recognized $0.4 million of stock-based compensation expense related to the Performance Condition portion of the 2018 PSU awards during 2018 based on the probability of attaining the Performance Condition. The Company has $0.2 million of unrecognized stock-based compensation expense related to the Performance Condition portion of the 2018 PSU awards at December 31, 2019. The Company recognized $0.9 million of stock-based compensation expense related to the Performance Condition portion of the 2017 PSU awards as of December 31, 2019 based on the achievement of 121% of the target performance level. Based on these results and board approval, 55,080 PSU’s vested during the first quarter of 2020 with respect to the portion of the 2017 PSU awards subject to the Performance Condition.

Deferred Compensation Plans

The purpose of the Company’s Amended and Restated Executives’ Deferred Compensation Plan (the “Executive Plan”), a non-qualified deferred compensation plan, is to provide an opportunity for certain eligible employees of the Company to defer a portion of their compensation and to invest in the Company’s common shares. The purpose of the Company’s Amended and Restated

Director Deferred Compensation Plan (the “Director Plan”) is to provide its directors with an opportunity to defer their director compensation and to invest in the Company’s common shares.

Compensation expense deferred into the Executive Plan and the Director Plan (together the “Plans”) totaled $0.2 million for both the years ended December 31, 2019 and 2018, and $0.4 million for the year ended December 31, 2017. The portion of cash compensation deferred by employees and directors under the Plans is invested in fully-vested equity units in the Plans. One equity unit is the equivalent of one common share. Equity units and the related dividends (if any) will be converted and generally distributed to the employee or director in the form of common shares at the earlier of his or her elected distribution date or termination of service as an employee or director of the Company. Distributions from the Plans totaled $0.2 million during each of the years ended December 31, 2019, 2018 and 2017. As of December 31, 2019, there were a total of 63,958 equity units with a value of $1.5 million outstanding under the Plans. The aggregate fair market value of these units at December 31, 2019, based on the closing price of the underlying common shares, was approximately $2.5 million, and the associated deferred tax benefit the Company would recognize if the outstanding units were distributed was $1.1 million as of December 31, 2019. Common shares are issued from treasury shares upon distribution of equity units from the Plans.

Profit Sharing and Retirement Plan

The Company has a profit-sharing and retirement plan that covers substantially all Company employees and permits participants to make contributions to the plan on a pre-tax basis in accordance with the provisions of Section 401(k) of the Internal Revenue Code of 1986, as amended. Company contributions to the plan are also made at the discretion of the Company’s board of directors based on the Company’s profitability and resulted in a $2.9 million, $2.3 million and $1.8 million expense for the years ended December 31, 2019, 2018 and 2017, respectively.