Company Quick10K Filing
Quick10K
MI Homes
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$27.35 28 $764
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
8-K 2019-02-06 Officers, Exhibits
8-K 2019-02-05 Earnings, Exhibits
8-K 2018-10-24 Earnings, Exhibits
8-K 2018-08-14 Other Events, Exhibits
8-K 2018-07-25 Earnings, Exhibits
8-K 2018-06-22 Enter Agreement, Exhibits
8-K 2018-05-08 Officers, Shareholder Vote, Exhibits
8-K 2018-04-25 Earnings, Exhibits
8-K 2018-02-28 Other Events
8-K 2018-02-26 Regulation FD, Exhibits
8-K 2018-02-21 Suspend Trading, Exhibits
8-K 2018-02-15 Shareholder Rights, Exhibits
8-K 2018-02-01 Earnings, Exhibits
LEN Lennar
TOL Toll Brothers
THO Thor Industries
MTH Meritage Homes
LGIH LGI Homes
JOE St Joe
WLH William Lyon Homes
BZH Beazer Homes
STRS Stratus Properties
HOV Hovnanian Enterprises
MHO 2018-12-31
Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Part II
Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7: Management's Discussion and Analysis of Financial Condition and Results
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Note 1. Summary of Significant Accounting Policies
Note 2. Stock-Based and Deferred Compensation
Note 3. Fair Value Measurements
Note 4. Inventory
Note 5. Transactions with Related Parties
Note 6. Investment in Joint Venture Arrangements
Note 7. Guarantees and Indemnifications
Note 8. Commitments and Contingencies
Note 9. Lease Commitments
Note 10. Community Development District Infrastructure and Related Obligations
Note 11. Debt
Note 12. Acquisition and Goodwill
Note 13. Earnings per Share
Note 14. Income Taxes
Note 15. Business Segments
Note 16. Supplemental Guarantor Information
Note 17. Supplementary Financial Data
Note 18. Share Repurchase Program
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
Part IV
Item 15. Exhibits, Financial Statement Schedules
Item 16. Form 10-K Summary
EX-21 exhibit21subsidiaries12-31.htm
EX-23 exhibit23consent12-31x18.htm
EX-24 exhibit24powerofattorney12.htm
EX-31.1 exhibit311ceocertification.htm
EX-31.2 exhibit312cfocertification.htm
EX-32.1 exhibit321ceocertification.htm
EX-32.2 exhibit322cfocertification.htm

MI Homes Earnings 2018-12-31

MHO 10K Annual Report

Balance SheetIncome StatementCash Flow

10-K 1 mho-20181231x10k.htm 10-K Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2018
o
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
 
Name of each exchange on which registered
Common Shares, par value $.01
 
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
X
 
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
X

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
X
 
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
X
 
No
 




Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ]

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
X
 
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
X

As of June 30, 2018, 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 (27,909,420 shares) was approximately $739.0 million.  The number of common shares of the registrant outstanding as of February 20, 2019 was 27,521,304.

DOCUMENT INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for the 2019 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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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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. Please 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 111,400 homes.
The Company consists of two distinct operations: homebuilding and financial services. Our homebuilding operations are aggregated for reporting purposes into three reporting segments - the Midwest, Mid-Atlantic and Southern regions. Our financial services operations support our homebuilding operations by providing mortgage loans and title services to the customers of our homebuilding operations and are reported as an independent segment. Please see Note 15 to our Consolidated Financial Statements for additional information related to the financial and operating results for each of our reporting segments.
Our homebuilding operations comprise the most significant portion of our business, representing 98% of consolidated revenue in 2018 and 97% in 2017. We design, market, construct and sell single-family homes and attached townhomes to first-time, millennial, 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 other type of residential property, and we use the term “community” to refer to a single development 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 209 communities within 16 markets located in ten states. Our average sales price of homes delivered during 2018 was $384,000, and the average sales price of our homes in backlog at December 31, 2018 was $409,000. We offer homes ranging from a base sales price of approximately $180,000 to $1,110,000 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 2018 and 3% in 2017. 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.

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Markets
For reporting purposes, our 16 homebuilding divisions are aggregated into the following three segments:
Region
Market/Division
Year Operations Commenced
Midwest
Columbus, Ohio
1976
Midwest
Cincinnati, Ohio
1988
Midwest
Indianapolis, Indiana
1988
Midwest
Chicago, Illinois
2007
Midwest
Minneapolis/St. Paul, Minnesota
2015
Midwest
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
Mid-Atlantic
Charlotte, North Carolina
1985
Mid-Atlantic
Raleigh, North Carolina
1986
Mid-Atlantic
Washington, D.C.
1991

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 continued to be favorable through the first half of 2018, as evidenced by our strong spring selling season. However, beginning in second half of 2018, the homebuilding industry experienced a softening in demand, after adjusting for normal seasonality, that we believe was a result of the rise in mortgage interest rates in 2018 and higher home prices which created affordability challenges for some prospective buyers. Despite this softening in demand in the second half of 2018, we also believe that many of the fundamentals supporting continued growth in demand remain favorable, including 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 2018 remained at a pace consistent with 2017.
Business Strategy
Although higher prices and rising interest rates began to adversely impact new home sales in the second half of 2018, we believe that other fundamentals underlying housing demand, linked to low unemployment and higher wages, remain favorable. We remain focused on increasing our profitability by generating additional revenue and improving overhead operating leverage, continuing to expand our market share, shifting product mix to include more affordable designs, investing in attractive land opportunities and increasing our number of average active communities. Consistent with our focus on improving long-term financial results, we expect to emphasize the following strategic business objectives in 2019:
profitably growing our presence in our existing markets, including opening new communities;
expanding the availability of our more affordable Smart Series homes;
reviewing new markets for additional investment opportunities;
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 2017 and 2018 will continue in 2019.

4



Sales and Marketing
During 2018, 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. In addition, the Hans Hagen brand is used in older communities in our Minneapolis/St. Paul market, and following our acquisition of the homebuilding assets and operations of Pinnacle Homes, a privately-held homebuilder in the Detroit, Michigan market in March 2018, the Pinnacle Homes brand is used in that market in connection with the sale of homes in active communities as of the date of the acquisition. 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 15-year transferable structural warranty in all of our markets other than Texas and a 10-year transferable structural 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 thousands 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 centers 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, 2018, we employed 235 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

5



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 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 traditional media such as newspapers, direct mail, billboards, radio and television. The particular media used differs from market to market based on area demographics and other competitive factors. In 2018, we significantly increased the reach of our website through enhanced search engine optimization, search engine marketing, and display advertising. We have reinforced 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 $1,110,000 and from approximately 1,200 to 5,500 square feet. In addition to single-family detached homes, we also offer attached townhomes in some 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 750 different floor plans designed to reflect current lifestyles and design trends. Our Showcase Collection is designed for our move-up and luxury homebuyers and offers more design options, larger floor plans, and a higher-end product line of homes in upscale communities. In addition, we are developing 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 share successful plans with other divisions, when appropriate.
We are continuing to implement our “Smart Series” floor plans of smaller square footage to target a more affordable sales price in several of our markets. 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 current trends, livability and offering design flexibility to our customers. We are actively selling “Smart Series” floor plans in the majority of our markets and they have become an important and successful part of our overall product lineup.
Our new “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

6



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 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 2018 and 2017, 45% and 47%, 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, 2018, we had a total of 2,194 homes, with $896.7 million aggregate sales value, in backlog in various stages of completion, including homes that are under contract but for which construction had not yet begun. As of December 31, 2017, we had a total of 2,014 homes, with $791.3 million aggregate sales value, in backlog. 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 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

7



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, 2017 and 2016 (as more fully discussed in Note 8 to our Consolidated Financial Statements)) was approximately 0.8% of total housing revenue in each of 2018 and 2017 and 0.9% of total housing revenue in 2016.
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 the 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, utilities, 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 1 to our Consolidated Financial Statements.
In 2018, 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 2018 and 2017, we developed over 74% and 72%, 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 1 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, 2018:
 
Lots Owned
 
 
Region
Developed Lots
Lots Under Development
Undeveloped Lots (a)
Total Lots Owned
Lots Under Contract
Total
Midwest
3,119

420

2,105

5,644

6,460

12,104

Southern
2,171

1,441

2,895

6,507

5,636

12,143

Mid-Atlantic
721

552

639

1,912

2,564

4,476

Total
6,011

2,413

5,639

14,063

14,660

28,723

(a)
Includes our interest in raw land held by joint venture arrangements expected to be developed into 1,159 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, and our majority-owned subsidiary, Washington/Metro Residential Title Agency, 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, Austin, and Washington, D.C. 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, 2018, we employed 1,359 people (including part-time employees), of which 1,085 were employed in homebuilding operations, 178 were employed in financial services and 97 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 Securities and Exchange Commission (“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
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.
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 .
During the second half of 2018, demand for new homes slowed, which we believe was a result of higher interest rates and higher home prices. While the absorption pace of our new contracts per community remained relatively stable in 2018, a further 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.
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

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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. However, the Federal Reserve raised its benchmark rate several times during 2017 and 2018, and indicated that additional increases in interest rates in 2019 are possible. 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.
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

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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 2018, we experienced increases in the costs of labor and materials. The increased labor costs were primarily the result of shortages of skilled labor in many parts of the country. The increased material costs were due to inflationary pressures and, during the middle part of the year, tariffs on Canadian lumber and other imported building materials. Increases in construction costs that exceeded our increase in home pricing eroded our gross margins from home sales during 2018 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 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.

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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 labor and materials that in some cases have exceeded our ability to raise the sales prices on our homes, which put downward pressure on our margins in 2018, 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, Maryland, Virginia, 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 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.

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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 mortgage warehousing agreement of our financial services segment will expire in June 2019.
M/I Financial is party to a $125 million secured mortgage warehousing agreement, as amended, among M/I Financial, the lenders party thereto and the administrative agent (the “MIF Mortgage Warehousing Agreement”). M/I Financial uses the MIF Mortgage Warehousing Agreement to finance eligible residential mortgage loans originated by M/I Financial. The MIF Mortgage Warehousing Agreement will expire on June 21, 2019. If we are unable to renew or replace the MIF Mortgage Warehousing Agreement when it matures, the activities of our financial services segment could be seriously 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 5.625% Senior Notes due 2025 (the “2025 Senior Notes”) and the indenture governing our 6.75% Senior Notes due 2021 (the “2021 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 2025 Senior Notes and the indenture governing the 2021 Senior Notes also contain covenants that may restrict our ability to operate our business and may prohibit or limit our ability to enhance 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 2025 Senior Notes and/or the indenture governing the 2021 Senior Notes could result in a default under the applicable indenture, in which case holders of the 2025 Senior Notes and/or the 2021 Senior Notes may be entitled to cause the sums evidenced by such notes to become due immediately. This acceleration of our obligations under the 2025 Senior Notes and the 2021 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, 2018, we had approximately $667.8 million of indebtedness (net of debt issuance costs), excluding issuances of letters of credit, the MIF Mortgage Warehousing Agreement and our $50 million mortgage repurchase agreement, as amended, dated October 30, 2017, with M/I Financial as borrower (the “MIF Mortgage Repurchase Facility”), and we had $329.9 million of remaining availability for borrowings under the Credit Facility. In addition, under the terms of the Credit Facility, the indentures governing the 2025 Senior Notes and the 2021 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.

16



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. In 2018, short-term rates increased due to actions taken by the Federal Reserve and, therefore, borrowing costs increased in 2018, and may increase further in 2019, based on statements made by the Federal Reserve;
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 2025 Senior Notes and 2021 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 2025 Senior Notes and the 2021 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.

17



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. Please 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.

18



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, Washington, D.C. 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 Midwest 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 home buyers. 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

19



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
We own and operate an approximately 85,000 square foot office building for our home office in Columbus, Ohio and lease all of our other offices. As of September 30, 2018, we reclassified this building as an asset held for sale. For further discussion, please see Note 1 to our Consolidated Financial Statements in Item 8 of this Form 10-K.
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. Please refer to 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 position, 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 20, 2019, there were approximately 444 record holders of the Company’s common shares. At that date, there were 30,137,141 common shares issued and 27,521,304 common shares outstanding.



21



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, 2018, 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-c611bc96401e540fa18.jpg
 
Period Ending
Index
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
M/I Homes, Inc.
$
100.00

$
90.22

$
86.13

$
98.94

$
135.17

$
82.59

S&P 500
100.00

113.69

115.26

129.05

157.22

150.33

S&P 500 Homebuilding Index
100.00

111.43

120.95

110.32

191.24

129.56


22



Share Repurchases
Common shares purchased during each month during the fourth quarter ended December 31, 2018 were as follows:
Period
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)
 
Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs (1)
 
 
 
 
 
 
 
 
October 1, 2018 - October 31, 2018
254,427

 
$
23.16

 
254,427

 
33,021,709

November 1, 2018 - November 30, 2018
228,883

 
$
23.63

 
228,883

 
27,613,196

December 1, 2018 - December 31, 2018
148,243

 
$
22.41

 
148,243

 
24,290,682

 
 
 
 
 
 
 
 
Quarter ended December 31, 2018
631,553

 
$
23.16

 
631,553

 
24,290,682

(1)
On August 14, 2018, the Company announced that its Board of Directors authorized a share repurchase program (the “2018 Share Repurchase Program”) pursuant to which the Company may purchase up to $50 million of its outstanding common shares through open market transactions, privately negotiated transactions or otherwise in accordance with all applicable laws, including pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. The 2018 Share Repurchase Program does not have an expiration date and may be modified, suspended or discontinued at any time. Please see Note 18 to our Consolidated Financial Statements for additional information.

Please see Note 11 to our Consolidated Financial Statements for more information regarding the limit imposed by the indenture governing our 2025 Senior Notes and the indenture governing our 2021 Senior Notes on our ability to pay dividends on, and repurchase, our common shares to the amount of the positive balance in our “restricted payments basket,” as defined in the indentures.

23



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)
2018
2017
2016
2015
2014
Income Statement (Year Ended December 31):
 
 
 
 
 
Revenue
$
2,286,282

$
1,961,971

$
1,691,327

$
1,418,395

$
1,215,180

Gross margin (a)
$
443,769

$
393,268

$
329,152

$
300,094

$
252,732

Income before income taxes (a) (b) (c)
$
141,289

$
120,324

$
91,785

$
86,929

$
69,736

Net income (a) (b) (c) (d) (e)
$
107,663

$
72,081

$
56,609

$
51,763

$
50,789

Preferred dividends
$

$
3,656

$
4,875

$
4,875

$
4,875

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

$
2,257

$

$

$

Net income to common shareholders
$
107,663

$
66,168

$
51,734

$
46,888

$
45,914

Earnings per share to common shareholders:
 

 

 

 

 

Basic:
$
3.81

$
2.57

$
2.10

$
1.91

$
1.88

Diluted:
$
3.70

$
2.26

$
1.84

$
1.68

$
1.65

Weighted average shares outstanding:
 

 

 

 

 

Basic
28,234

25,769

24,666

24,575

24,463

Diluted
29,178

30,688

30,116

30,047

29,912

Balance Sheet (December 31):
 

 

 

 

 

Inventory
$
1,674,460

$
1,414,574

$
1,215,934

$
1,112,042

$
918,589

Total assets
$
2,021,581

$
1,864,771

$
1,548,511

$
1,415,554

$
1,205,239

Notes payable banks – homebuilding operations
$
117,400

$

$
40,300

$
43,800

$
30,000

Notes payable banks – financial services operations
$
153,168

$
168,195

$
152,895

$
123,648

$
85,379

Notes payable - other
$
5,938

$
10,576

$
6,415

$
8,441

$
9,518

Convertible senior subordinated notes due 2017 - net
$

$

$
57,093

$
56,518

$
55,943

Convertible senior subordinated notes due 2018 - net
$

$
86,132

$
85,423

$
84,714

$
84,006

Senior notes - net
$
544,455

$
542,831

$
295,677

$
294,727

$
226,099

Shareholders’ equity
$
855,303

$
747,298

$
654,174

$
596,566

$
544,295

(a)
Includes $5.1 million ($0.13 per diluted share) of charges related to purchase accounting adjustments taken during 2018 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 $5.8 million ($0.15 per diluted share), $7.7 million ($0.16 per diluted share), $4.0 million ($0.08 per diluted share), $3.6 million ($0.08 per diluted share), and $3.5 million ($0.07 per diluted share) related to pre-tax impairment charges taken during the years ended December 31, 2018, 2017, 2016, 2015 and 2014, respectively.
(b)
Includes $1.7 million ($0.05 per diluted share) of 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 $9.3 million ($0.31 per diluted share) related to the accounting benefit from income taxes associated with the reversal of our deferred tax asset valuation allowance for the year ended December 31, 2014.
(e)
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.

24



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 111,400 homes since we commenced homebuilding activities in 1976. The Company’s homes are marketed and sold primarily under the M/I Homes brand (M/I Homes and Showcase Collection (exclusively by M/I)). In addition, the Hans Hagen brand is used in older communities in our Minneapolis/St. Paul, Minnesota market, and, following our acquisition of the homebuilding assets and operations of Pinnacle Homes, a privately-held homebuilder in the Detroit, Michigan market (“Pinnacle Homes”), in March 2018, the Pinnacle Homes brand is used in that market in connection with the sale of homes in active communities as of the date of the acquisition. The Company has homebuilding operations in Columbus and Cincinnati, Ohio; Indianapolis, Indiana; Chicago, Illinois; Minneapolis/St. Paul, Minnesota; Detroit, Michigan; Tampa, Sarasota and Orlando, Florida; Austin, Dallas/Fort Worth, Houston and San Antonio, Texas; Charlotte and Raleigh, North Carolina; and the Virginia and Maryland suburbs of Washington, D.C.
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;
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.  On January 1, 2018, we adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606, Revenue from Contracts from Customers (“ASC 606”), using the modified retrospective transition method, which includes a cumulative catch-up in retained earnings on the initial date of adoption for existing contracts (those contracts under which obligations have not been completed) as of, and new contracts after, January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605, Revenue Recognition (“ASC 605”). We did not have any material adjustments to our 2018 results under ASC 606.
Revenue from the sale of a home and revenue from the sale of land to third parties are recognized in the financial statements on the date of closing (point in time) if delivery has occurred, title has passed, all performance obligations have been met (see definition of performance obligations below), 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.
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 subservice 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 (note that guarantees are excluded from the scope of ASC 606). We recognize financial services revenue associated with our title operations as homes are delivered,

25



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.
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 contracts to sell homes 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 third party land contracts may include multiple performance obligations; however, revenue expected to be recognized 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 generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within general, selling and administrative expenses as part of our sales and marketing expenses. We do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.

Please see Note 1 to our Consolidated Financial Statements for additional information related to our revenues disaggregated by geography and revenue source.

Home Cost of Sales. All associated homebuilding costs are charged to cost of sales in the period when the revenues from home deliveries are recognized. Homebuilding costs include: land and land development costs; home construction costs (including an estimate of the costs to complete construction); previously capitalized interest; real estate taxes; indirect costs; and estimated warranty costs. All other costs are expensed as incurred. Sales incentives, including pricing discounts and financing costs paid by the Company, are recorded as a reduction of revenue in the Company’s Consolidated Statements of Income. Sales incentives in the form of options or upgrades are recorded in homebuilding costs.
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 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 disposition of all or a portion of the land owned), or discount rates, which could materially impact future cash flow and fair value estimates.

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As of December 31, 2018, 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, 2018, 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.
Goodwill. Goodwill represents the excess of the purchase price paid over the fair value of the net assets acquired and liabilities assumed in business combinations. As a result of the Company’s acquisition of the homebuilding assets and operations of Pinnacle Homes in Detroit, Michigan on March 1, 2018, the Company recorded goodwill of $16.4 million as of December 31, 2018, which is included as goodwill in our Consolidated Balance Sheets. This amount was based on the estimated fair values of the acquired assets and assumed liabilities at the date of the acquisition in accordance with ASC 350, Intangibles, Goodwill and Other (“ASC 350”). Please see Note 12 to the Company’s Consolidated Financial Statements for further discussion.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which eliminates Step 2 from the goodwill impairment test in order to simplify the subsequent measurement of goodwill. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. As a result of ASU 2017-04, the Company will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.  ASU 2017-04 is effective beginning January 1, 2020, with early adoption permitted, and applied prospectively. The Company elected to early adopt this ASU effective for the fiscal year ended December 31, 2018 in its impairment testing and analyses. The adoption of ASU 2017-04 on January 1, 2018 did not have an impact on the Company’s consolidated financial statements and disclosures. The Company performed its annual goodwill impairment analysis during the fourth quarter of 2018, and as no indicators for impairment existed at December 31, 2018, no impairment was recorded.

In accordance with ASC 350, the Company analyzes goodwill for impairment on an annual basis (or more often if indicators of impairment exist). The Company performs a qualitative assessment to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. When performing a qualitative assessment, the Company evaluates qualitative factors such as: (1) macroeconomic conditions, such as a deterioration in general economic conditions; (2) industry and market considerations, such as deterioration in the environment in which the entity operates; (3) cost factors, such as increases in raw materials and labor costs; and (4) overall financial performance, such as negative or declining cash flows or a decline in actual or planned revenue or earnings, to determine if it is more-likely-than-not that the fair value of the reporting unit is less than its carrying amount. If the qualitative assessment indicates that it is more-likely-than-not that the fair value of the reporting unit is less than its carrying amount, then a quantitative assessment is performed to determine the reporting unit’s fair value. If the reporting unit’s carrying value exceeds its fair value, then an impairment loss is recognized for the amount of the excess of the carrying amount over the reporting unit’s fair value.

The evaluation of goodwill for possible impairment includes estimating fair value using one or a combination of valuation techniques, such as discounted cash flows. These valuations require the Company to make estimates and assumptions regarding future operating results, cash flows, changes in capital expenditures, selling prices, profitability, and the cost of capital. Although the Company believes its assumptions and estimates are reasonable, deviations from the assumptions and estimates could produce a materially different result.

Land Option or Purchase Agreements. In accordance with ASC 810-10, Consolidation (“ASC 810”), we analyze our land option or purchase agreements to determine whether the corresponding land seller is a variable interest entity (“VIE”) and, if so, whether we are the primary beneficiary (using an analysis similar to that described in Note 1 to our Consolidated Financial Statements within the description of our significant accounting policy for VIEs). Although we do not have legal title to the optioned land, ASC 810 requires a company to consolidate a VIE if the company is determined to be the primary beneficiary. In cases where we are the primary beneficiary, even though we do not have title to such land, we are required to consolidate these purchase/option agreements and reflect such assets and liabilities as Consolidated Inventory Not Owned on our Consolidated Balance Sheets. At

27



both December 31, 2018 and 2017, we have concluded that we were not the primary beneficiary of any VIEs from which we are purchasing under land option or purchase agreements.
In addition, we evaluate our land option or purchase agreements to determine for each contract if (1) a portion or all of the purchase price is a specific performance requirement, or (2) the amount of deposits and prepaid acquisition and development costs have exceeded certain thresholds relative to the remaining purchase price of the lots. If either is the case, then the remaining purchase price of the lots (or the specific performance amount, if applicable) is recorded as an asset and liability in Consolidated Inventory Not Owned on our Consolidated Balance Sheets.
Please see Note 1 to our Consolidated Financial Statements and the “Off-Balance Sheet Arrangements” section below for additional information related to our off-balance-sheet arrangements.
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. Our warranty reserves were adversely affected by stucco-related repairs in certain of our Florida communities in each of 2018, 2017 and 2016. Please see Note 1 and Note 8 to our Consolidated Financial Statements for additional information related to our warranty reserves.
Self-insurance Reserves. Self-insurance reserves are made for estimated liabilities associated with employee health care, workers’ compensation, and general liability insurance. The reserves related to employee health care and workers’ compensation are based on historical experience and open case reserves. Our workers’ compensation claims and our general liability claims are insured by a third party, except for workers compensation claims made in the State of Ohio where the Company is self-insured. The Company records a reserve for general liability claims falling below the Company’s deductible. The reserve estimate is based on an actuarial evaluation of our past history of general liability claims, other industry specific factors and specific event analysis. Because of the high degree of judgment required in determining these estimated accrual amounts, actual future costs could differ from our current estimated amounts. Please see Note 1 to our Consolidated Financial Statements for additional information related to our self-insurance reserves.
Stock-Based 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. As discussed further in Notes 1 and 2 to our Consolidated Financial Statements, 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. The grant date fair value for stock option awards and PSU’s with a market condition (as defined in ASC 718) is estimated using the Black-Scholes option pricing model and the Monte Carlo simulation methodology, respectively. The grant

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date fair value for the director stock units and 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. We recognize stock-based compensation expense for our stock option awards and PSU’s with a market condition over the requisite service period of the award while stock-based compensation expense for our director stock units, which vest immediately, is fully recognized in the period of the award. For the portion of the PSU’s awarded subject to the satisfaction of a performance condition, we recognize 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, compensation expense recognition is deferred until probability is attained and a cumulative stock-based compensation expense adjustment is recorded and recognized ratably over the remaining service period. The Company reevaluates 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. Please see Note 2 to our Consolidated Financial Statements for more information regarding our stock-based compensation.
Valuation of Deferred Tax Assets. The Company records income taxes under the asset and liability method, under which deferred tax assets and liabilities are recognized based on future tax consequences attributable to (1) temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and (2) operating loss and tax credit carryforwards, if applicable. Deferred tax assets and liabilities are measured using enacted tax rates in effect in the years in which those temporary differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period when the change is enacted. Please see Note 14 to our Consolidated Financial Statements for further discussion.
In accordance with ASC 740-10, Income Taxes (“ASC 740”), we evaluate the realizability of our deferred tax assets, including the benefit from net operating losses (“NOLs”) and tax credit carryforwards, to determine if a valuation allowance is required based on whether it is more likely than not (a likelihood of more than 50%) that all or any portion of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is primarily dependent upon the generation of future taxable income. In determining the future tax consequences of events that have been recognized in the financial statements or tax returns, judgment is required. Please see Note 1 to our Consolidated Financial Statements for additional information related to our valuation of deferred tax assets. We have no valuation allowance on our deferred tax assets and state NOL carryforwards at December 31, 2018.
Segment Reporting. The application of segment reporting requires significant judgment in determining our operating segments. Operating segments are defined as a component of an enterprise for which discrete financial information is available and is reviewed regularly by the Company’s chief operating decision makers to evaluate performance, make operating decisions and determine how to allocate resources.  The Company’s chief operating decision makers evaluate the Company’s performance in various ways, including: (1) the results of our 16 individual homebuilding operating segments and the results of our financial services operations; (2) the results of our three homebuilding reportable segments; and (3) our consolidated financial results.
In accordance with ASC 280, Segment Reporting (“ASC 280”), we have identified each homebuilding division as an operating segment as each homebuilding division engages in business activities from which it earns revenue, primarily from the sale and construction of single-family attached and detached homes, acquisition and development of land, and the occasional sale of lots to third parties. Our financial services operations generate revenue primarily from the origination, sale and servicing of mortgage loans and title services primarily for purchasers of the Company’s homes and are included in our financial services reportable segment. Corporate is a non-operating segment that develops and implements strategic initiatives and supports our operating segments by centralizing key administrative functions such as accounting, finance, treasury, information technology, insurance and risk management, legal, marketing and human resources.
In accordance with the aggregation criteria defined in ASC 280, we have determined our reportable segments are as follows: Midwest homebuilding, Southern homebuilding, Mid-Atlantic homebuilding and financial services operations.  The homebuilding operating segments included in each reportable segment have been aggregated because they share similar aggregation characteristics as prescribed in ASC 280 in the following regards: (1) long-term economic characteristics; (2) historical and expected future long-term gross margin percentages; (3) housing products, production processes and methods of distribution; and (4) geographical proximity. We may, however, be required to reclassify our reportable segments if markets that currently are being aggregated do not continue to share these aggregation characteristics which are evaluated annually.

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The homebuilding operating segments that comprise each of our reportable segments are as follows:
Midwest
Southern
Mid-Atlantic
Chicago, Illinois
Orlando, Florida
Charlotte, North Carolina
Cincinnati, Ohio
Sarasota, Florida
Raleigh, North Carolina
Columbus, Ohio
Tampa, Florida
Washington, D.C.
Indianapolis, Indiana
Austin, Texas
 
Minneapolis/St. Paul, Minnesota
Dallas/Fort Worth, Texas
 
Detroit, Michigan
Houston, Texas
 
 
San Antonio, Texas
 
RESULTS OF OPERATIONS
Overview
For the year ended December 31, 2018, we achieved record levels of new contracts, homes delivered, revenue and net income. Additionally, our complementary financial services business also achieved record revenue and a record number of loans originated in 2018. Housing market conditions continued to be favorable through the first half of 2018, as evidenced by our strong spring selling season. However, beginning in the second half of 2018, the homebuilding industry experienced a softening in demand, after adjusting for normal seasonality, that we believe was a result of the rise in mortgage interest rates that occurred in 2018 and higher home prices which created affordability challenges for some prospective buyers. Despite this softening in demand in the second half of 2018, we also believe that many of the fundamentals supporting continued growth in demand remain favorable, including high consumer confidence, growth in employment, wage increases, and a limited supply of available new and existing homes. Company-wide, our absorption pace of sales per community for 2018 remained at a pace consistent with 2017.
Due to the continued execution of our strategic business initiatives and the overall level of housing demand in 2018, we were able to achieve the following improved results in 2018 in comparison to the year ended December 31, 2017:
New contracts increased 10% to 5,845 - a record high for our Company
Homes delivered increased 14% to 5,778 - a record high for our Company
Average sales price of homes delivered increased 4% to $384,000
Number of homes in backlog increased 9%, and our total sales value in backlog increased 13% to $897 million
Average sales price of homes in backlog increased 4% to $409,000 - a record high for our Company
Revenue increased 17% to $2.29 billion - a record high for our Company
Number of active communities at December 31, 2018 increased 11% to 209

Summary of Company Financial Results in 2018
The calculations of adjusted income before income taxes, adjusted net income available to common shareholders, and adjusted housing gross margin, which we believe provide a clearer measure of the ongoing performance of our business, are described and reconciled to income before income taxes, net income available to common shareholders, and housing gross margin, the financial measures that are calculated using our GAAP results, below under “Non-GAAP Financial Measures.”
Income before income taxes for the twelve months ended December 31, 2018 increased 17% from $120.3 million for the year ended December 31, 2017 to $141.3 million for the year ended December 31, 2018. Income before income taxes for 2018 was unfavorably impacted by $5.1 million of charges for the amortization of inventory profit write-up related to purchase accounting adjustments on Detroit homes that were delivered during 2018 incurred as a result of our acquisition of Pinnacle Homes in March 2018 (as more fully discussed below and in Note 12 to our Consolidated Financial Statements), $1.7 million of acquisition and integration costs related to our acquisition of Pinnacle Homes, and asset impairment charges of $5.8 million. Income before income taxes for 2017 was unfavorably impacted by 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) and asset impairment charges of $7.7 million. Excluding these acquisition-related and impairment charges in 2018, and the stucco-related and impairment charges in 2017, adjusted income before income taxes increased 13% from $136.5 million in 2017 to $153.9 million in 2018.
In 2018, we achieved net income available to common shareholders of $107.7 million, or $3.70 per diluted share, which includes the after-tax impact of the acquisition-related (which includes both the purchase accounting adjustment and acquisition and integration costs noted above) and asset impairment charges noted above. This compares to net income available to common shareholders of $66.2 million, or $2.26 per diluted share in 2017, which includes the after-tax impact of the stucco-related and asset impairment charges noted above as well as a non-cash tax expense of approximately $6.5 million related to the re-measurement of our deferred tax assets as a result of the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”), a $2.3 million non-cash equity

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charge resulting from the excess of fair value over carrying value of our Series A Preferred Shares that were called for redemption in the third quarter of 2017, and $3.7 million in dividend payments made to holders of our then outstanding Series A Preferred Shares. Excluding the after-tax impact of the acquisition-related and asset impairment charges in 2018 (as discussed above), and the deferred tax asset re-measurement and the equity adjustment related to the redemption of our Series A Preferred Shares in 2017, and the after-tax impact of asset impairment and stucco-related charges taken in 2017 (as discussed above), adjusted net income available to common shareholders increased 37% from $85.3 million in 2017 to $117.3 million in 2018.
In 2018, we recorded record total revenue of $2.29 billion, of which $2.22 billion was from homes delivered, $16.9 million was from land sales, and $52.2 million was from our financial services operations. Revenue from homes delivered increased 18% from 2017 driven primarily by the 689 additional homes delivered in 2018 (a 14% increase) and the 4% increase in the average sales price of homes delivered in 2018 ($15,000 per home delivered) compared to 2017. Revenue from land sales decreased $16.8 million from 2017 due primarily to fewer land sales in our Mid-Atlantic region in the current year compared to the prior year. Revenue from our financial services segment increased 5% to $52.2 million in 2018 as a result of increases in the number of loan originations, increases in the average loan amount, the sale of a portion of our servicing portfolio, and a higher volume of loans sold, partially offset by lower margins on loans sold during the period than we experienced in 2017.
Total gross margin (total revenue less total land and housing costs) increased $50.5 million in 2018 compared to 2017 as a result of a $48.0 million improvement in the gross margin of our homebuilding operations and a $2.5 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 $48.8 million, due to the 14% increase in the number of homes delivered, the 4% increase in the average sales price of homes delivered, the absence of $8.5 million in stucco-related repair charges taken in 2017 and a decline of $1.9 million in asset impairment charges. Our housing gross margin percentage declined 50 basis points from 18.1% in the prior year to 17.6% in 2018. Exclusive of the purchase accounting adjustments and asset impairment charges in 2018 and the stucco-related and asset impairment charges in 2017 discussed above, our adjusted housing gross margin percentage declined 90 basis points in 2018 to 18.1% from 19.0% in 2017, largely as a result of higher construction and lot costs in 2018 compared to 2017 as well as the mix of homes delivered during 2018 compared to 2017. Our gross margin on land sales (land gross margin) declined $0.8 million in 2018 compared to 2017 as a result of fewer land sales in the current year compared to the prior year. The gross margin of our financial services operations increased $2.5 million in 2018 compared to 2017 as a result of increases in the number of loan originations, the average loan amount and the volume of loans sold.
We believe the increased sales volume and higher sales prices on homes delivered in 2018 compared to 2017 were driven primarily by the opening of new communities which increased our average number of locations selling homes, along with the continued strong economic conditions described above (particularly during the first half of 2018), constrained supply/demand conditions, better pricing leverage in select locations and submarkets, and shifts in both product and community mix. We opened 67 new communities during 2018. We sell a variety of home types in various communities and markets, each of which yields a different gross margin. The timing of the openings of new replacement communities as well as underlying lot costs varies from year to year. As a result, our new contracts and housing gross margin may fluctuate up or down from 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. In 2018, we were able to pass a portion of the higher construction and lot costs to our homebuyers in the form of higher sales prices. However, we cannot provide any assurance that we will be able to continue to raise prices.
For 2018, selling, general and administrative expense increased $26.0 million, which partially offset the increase in our gross margin discussed above, but declined as a percentage of revenue to 12.3% in 2018 compared to 13.0% in 2017. Selling expense increased $14.5 million from 2017 but declined as a percentage of revenue to 6.2% in 2018 compared to 6.5% for 2017. Variable selling expense for sales commissions contributed $12.6 million to the increase ($2.5 million of which related to incremental costs associated with our new Detroit division) due to the higher average sales price of homes delivered and the higher number of homes delivered. The increase in selling expense was also attributable to a $1.9 million increase in non-variable selling expense primarily related to incremental costs associated with our additional sales offices and models in our new Detroit division. General and administrative expense increased $11.5 million compared to 2017 but declined as a percentage of revenue from 6.4% in 2017 to 6.0% in 2018. The dollar increase in general and administrative expense was primarily due to a $3.7 million increase related to incremental costs associated with our Detroit division, a $3.1 million increase in compensation-related expenses primarily due to an increase in employee count, a $1.9 million increase in professional fees, a $1.6 million increase in costs associated with new information systems, a $1.0 million increase in rent, and a $0.2 million increase in other miscellaneous expenses.
Outlook
Although higher home prices and rising interest rates began to adversely impact new home sales in the second half of 2018, we believe that other fundamentals underlying housing demand, linked to low unemployment and higher wages, remain favorable.

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We remain focused on increasing our profitability by generating additional revenue and improving overhead operating leverage, continuing to expand our market share, shifting our product mix to include more affordable designs, investing in attractive land opportunities and increasing our number of average active communities.

We expect to emphasize the following strategic business objectives in 2019:
profitably growing our presence in our existing markets, including opening new communities;
expanding the availability of our more affordable Smart Series homes;
reviewing new markets for additional investment opportunities;
maintaining a strong balance sheet; and
emphasizing customer service, product quality and design, and premier locations.

Consistent with these objectives, we took a number of steps in 2018 for continued improvement in our financial and operating results in 2019 and beyond, including investing $330.5 million in land acquisitions and $221.9 million in land development in 2018 to help grow our presence in our existing markets. We currently estimate that we will spend approximately $575 million to $600 million on land purchases and land development in 2019. However, land transactions are subject to a number of factors, including our financial condition and market conditions, as well as satisfaction of various conditions related to specific properties. We will continue to monitor market conditions and our ongoing pace of home sales and deliveries, and we will adjust our land spending accordingly.
We ended 2018 with more than 28,700 lots under control, which represents a 5.0 year supply of lots based on 2018 homes delivered, including certain lots that we anticipate selling to third parties. This represents a 1% increase from our approximately 28,500 lots under control at the end of 2017. We also opened 67 communities and closed 56 communities in 2018, ending the year with a total of 209 communities. Of our total communities, 19 offered our more affordable Smart Series designs, which are primarily designed for first-time homebuyers. We estimate that our average community count in 2019 will increase by approximately 5% from our average community count of 205 communities in 2018.
Going forward, we believe our abilities to leverage our fixed costs, obtain land at desired rates of return, and open and grow our active communities provide our best opportunities for continuing to improve our financial results. However, we can provide no assurance that the positive trends reflected in our financial and operating metrics will continue in the future.

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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, 2018, 2017 and 2016:
 
Year Ended
(In thousands)
2018
 
2017
 
2016
Revenue:
 
 
 
 
 
Midwest homebuilding
$
933,119

 
$
742,577

 
$
637,894

Southern homebuilding
925,404

 
730,482

 
602,273

Mid-Atlantic homebuilding
375,563

 
439,219

 
409,149

Financial services (a)
52,196

 
49,693

 
42,011

Total revenue
$
2,286,282

 
$
1,961,971

 
$
1,691,327

 
 
 
 
 
 
Gross margin:
 
 
 
 
 
Midwest homebuilding (b)
$
165,187

 
$
149,080

 
$
126,675

Southern homebuilding (c)
168,504

 
119,719

 
87,815

Mid-Atlantic homebuilding
57,882

 
74,776

 
72,651

Financial services (a)
52,196

 
49,693

 
42,011

Total gross margin (b) (c) (d)
$
443,769

 
$
393,268

 
$
329,152

 
 
 
 
 
 
Selling, general and administrative expense:
 
 
 
 
 
Midwest homebuilding
$
79,056

 
$
67,558

 
$
56,229

Southern homebuilding
95,904

 
82,921

 
67,417

Mid-Atlantic homebuilding
34,570

 
39,178

 
39,201

Financial services (a)
24,714

 
22,405

 
18,749

Corporate
46,364

 
42,547

 
38,813

Total selling, general and administrative expense
$
280,608

 
$
254,609

 
$
220,409

 
 
 
 
 
 
Operating income (loss):
 
 
 
 
 
Midwest homebuilding (b)
$
86,131

 
$
81,522

 
$
70,446

Southern homebuilding (c)
72,600

 
36,798

 
20,398

Mid-Atlantic homebuilding
23,312

 
35,598

 
33,450

Financial services (a)
27,482

 
27,288

 
23,262

Less: Corporate selling, general and administrative expense
(46,364
)
 
(42,547
)
 
(38,813
)
Total operating income (b) (c) (d)
$
163,161

 
$
138,659

 
$
108,743

 
 
 
 
 
 
Interest expense:
 
 
 
 
 
Midwest homebuilding
$
7,142

 
$
5,010

 
$
3,754

Southern homebuilding
7,362

 
8,508

 
8,039

Mid-Atlantic homebuilding
2,711

 
2,599

 
3,693

Financial services (a)
3,269

 
2,757

 
2,112

Total interest expense
$
20,484

 
$
18,874

 
$
17,598

 
 
 
 
 
 
Equity in income from joint venture arrangements
$
(312
)
 
$
(539
)
 
$
(640
)
Acquisition and integration costs (e)
1,700

 

 

 
 
 
 
 
 
Income before income taxes
$
141,289

 
$
120,324

 
$
91,785

 
 
 
 
 
 
Depreciation and amortization:
 

 
 

 
 

Midwest homebuilding
$
2,448

 
$
2,069

 
$
1,752

Southern homebuilding
3,210

 
3,014

 
2,525

Mid-Atlantic homebuilding
1,262

 
1,565

 
1,645

Financial services
1,281

 
1,503

 
1,948

Corporate
6,330

 
6,023

 
5,736

Total depreciation and amortization
$
14,531

 
$
14,174

 
$
13,606

(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 $5.1 million of charges related to purchase accounting adjustments taken during 2018 as a result of our acquisition of Pinnacle Homes in Detroit, Michigan on March 1, 2018.
(c)
The years ended December 31, 2017 and 2016 include an $8.5 million and a $19.4 million charge, respectively, 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, 2018, 2017 and 2016, total gross margin and total operating income were reduced by $5.8 million, $7.7 million and $4.0 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.

33



The following tables show total assets by segment at December 31, 2018, 2017 and 2016:
 
At December 31, 2018
(In thousands)
Midwest
 
Southern
 
Mid-Atlantic
 
Corporate, Financial Services and Unallocated
 
Total
Deposits on real estate under option or contract
$
5,725

 
$
21,758

 
$
6,179

 
$

 
$
33,662

Inventory (a)
696,057

 
717,248

 
227,493

 

 
1,640,798

Investments in joint venture arrangements
1,562

 
14,263

 
20,045

 

 
35,870

Other assets
19,524

 
32,161

(b) 
10,925

 
248,641

(c) 
311,251

Total assets
$
722,868

 
$
785,430

 
$
264,642

 
$
248,641

 
$
2,021,581

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

 
$
20,719

 
$
6,904

 
$

 
$
32,556

Inventory (a)
500,671

 
636,019

 
245,328

 

 
1,382,018

Investments in joint venture arrangements
4,410

 
9,677

 
6,438

 

 
20,525

Other assets
13,573

 
38,784

(b) 
13,311

 
364,004

(d) 
429,672

Total assets
$
523,587

 
$
705,199

 
$
271,981

 
$
364,004

 
$
1,864,771

 
At December 31, 2016
(In thousands)
Midwest
 
Southern
 
Mid-Atlantic
 
Corporate, Financial Services and Unallocated
 
Total
Deposits on real estate under option or contract
$
3,989

 
$
22,607

 
$
3,260

 
$

 
$
29,856

Inventory (a)
399,814

 
484,038

 
302,226

 

 
1,186,078

Investments in unconsolidated joint ventures
10,155

 
10,630

 
7,231

 

 
28,016

Other assets
25,747

 
35,622

(b) 
13,912

 
229,280

(e) 
304,561

Total assets
$
439,705

 
$
552,897

 
$
326,629

 
$
229,280

 
$
1,548,511

(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 increase in Corporate, Financial Services, and Unallocated other assets from prior year is related to an increase in cash on hand at the end of 2017 due primarily to the issuance of our $250.0 million in aggregate principal amount of 2025 Senior Notes during the year ended December 31, 2017.
(e)
During the first quarter of 2016, the Company purchased an airplane for $9.9 million. The asset is included within Property and Equipment - Net in our Consolidated Balance Sheets.


34



Reportable Segments
The following table presents, by reportable segment, selected operating and financial information as of and for the years ended December 31, 2018, 2017 and 2016:
 
Year Ended December 31,
(Dollars in thousands)
2018
 
2017
 
2016
Midwest Region
 
 
 
 
 
Homes delivered
2,317

 
1,907

 
1,690

New contracts, net
2,306

 
1,978

 
1,775

Backlog at end of period
930

 
828

 
757

Average sales price of homes delivered
$
402

 
$
387

 
$
374

Average sales price of homes in backlog
$
441

 
$
415

 
$
403

Aggregate sales value of homes in backlog
$
410,434

 
$
343,660

 
$
304,826

Housing revenue
$
932,248

 
$
738,743

 
$
631,772

Land sale revenue
$
871

 
$
3,834

 
$
6,122

Operating income homes (a) (b)
$
85,747

 
$
80,762

 
$
68,891

Operating income land
$
384

 
$
760

 
$
1,555

Number of average active communities
84

 
64

 
66

Number of active communities, end of period
90

 
69

 
61

Southern Region
 
 
 
 
 
Homes delivered
2,579

 
2,108

 
1,708

New contracts, net
2,697

 
2,342

 
1,822

Backlog at end of period
1,026

 
908

 
674

Average sales price of homes delivered
$
355

 
$
342

 
$
342

Average sales price of homes in backlog
$
373

 
$
365

 
$
355

Aggregate sales value of homes in backlog
$
382,217

 
$
331,837

 
$
239,067

Housing revenue
$
915,945

 
$
720,704

 
$
583,817

Land sale revenue
$
9,459

 
$
9,778

 
$
18,456

Operating income homes (a) (c)
$
71,130

 
$
35,198

 
$
18,086

Operating income land
$
1,470

 
$
1,600

 
$
2,312

Number of average active communities
92

 
85

 
71

Number of active communities, end of period
90

 
87

 
79

Mid-Atlantic Region
 
 
 
 
 
Homes delivered
882

 
1,074

 
1,084

New contracts, net
842

 
979

 
1,158

Backlog at end of period
238

 
278

 
373

Average sales price of homes delivered
$
418

 
$
390

 
$
364

Average sales price of homes in backlog
$
437

 
$
416

 
$
380

Aggregate sales value of homes in backlog
$
104,063

 
$
115,756

 
$
141,564

Housing revenue
$
369,004

 
$
419,125

 
$
394,907

Land sale revenue
$
6,559

 
$
20,094

 
$
14,242

Operating income homes (a)
$
23,121

 
$
35,109

 
$
33,183

Operating income land
$
191

 
$
489

 
$
267

Number of average active communities
29

 
34

 
39

Number of active communities, end of period
29

 
32

 
38

Total Homebuilding Regions
 
 
 
 
 
Homes delivered
5,778

 
5,089

 
4,482

New contracts, net
5,845

 
5,299

 
4,755

Backlog at end of period
2,194

 
2,014

 
1,804

Average sales price of homes delivered
$
384

 
$
369

 
$
359

Average sales price of homes in backlog
$
409

 
$
393

 
$
380

Aggregate sales value of homes in backlog
$
896,714

 
$
791,253

 
$
685,457

Housing revenue
$
2,217,197

 
$
1,878,572

 
$
1,610,496

Land sale revenue
$
16,889

 
$
33,706

 
$
38,820

Operating income homes (a) (b) (c) (d)
$
179,998

 
$
151,069

 
$
120,160

Operating income land
$
2,045

 
$
2,849

 
$
4,134

Number of average active communities
205

 
183

 
176

Number of active communities, end of period
209

 
188

 
178

(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 $5.1 million of charges related to purchase accounting adjustments taken during 2018 as a result of our acquisition of Pinnacle Homes in Detroit, Michigan on March 1, 2018.
(c)
Includes an $8.5 million and a $19.4 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 and 2016, respectively.
(d)
Includes $5.8 million, $7.7 million and $4.0 million of asset impairment charges taken during the years ended December 31, 2018, 2017 and 2016, respectively.

35



 
Year Ended December 31,
(Dollars in thousands)
2018
 
2017
 
2016
Financial Services
 
 
 
 
 
Number of loans originated
3,964

 
3,632

 
3,286

Value of loans originated
$
1,200,474

 
$
1,078,520

 
$
969,690

 
 
 
 
 
 
Revenue
$
52,196

 
$
49,693

 
$
42,011

Less: Selling, general and administrative expenses
24,714

 
22,405

 
18,749

Less: Interest expense
3,269

 
2,757

 
2,112

Income before income taxes
$
24,213

 
$
24,531

 
$
21,150

 
 
 
 
 
 
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, 2018, 2017 and 2016:
 
Year Ended December 31,
 
2018
 
2017
 
2016
Midwest
13.6
%
 
12.0
%
 
13.0
%
Southern
16.8
%
 
16.5
%
 
17.7
%
Mid-Atlantic
9.9
%
 
10.5
%
 
11.0
%
 
 
 
 
 
 
Total cancellation rate
14.6
%
 
13.8
%
 
14.4
%


36



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)
 
2018
 
2017
 
2016
Housing revenue
 
$
2,217,197

 
$
1,878,572

 
$
1,610,496

Housing cost of sales
 
1,827,669

 
1,537,846

 
1,327,489

 
 
 
 
 
 
 
Housing gross margin
 
389,528

 
340,726

 
283,007

Add: Stucco-related charges (a)
 

 
8,500

 
19,409

Add: Impairment (b)
 
5,809

 
7,681

 
3,992

Add: Purchase accounting adjustments (c)
 
5,147

 

 

 
 
 
 
 
 
 
Adjusted housing gross margin
 
$
400,484

 
$
356,907

 
$
306,408

 
 
 
 
 
 
 
Housing gross margin percentage
 
17.6
%
 
18.1
%
 
17.6
%
Adjusted housing gross margin percentage
 
17.8
%
 
19.0
%
 
19.0
%
 
 
 
 
 
 
 
Income before income taxes
 
$
141,289

 
$
120,324

 
$
91,785

Add: Stucco-related charges (a)
 

 
8,500

 
19,409

Add: Impairment (b)
 
5,809

 
7,681

 
3,992

Add: Purchase accounting adjustments (c)
 
5,147

 

 

Add: Acquisition and integration costs (d)
 
1,700

 

 

 
 
 
 
 
 
 
Adjusted income before income taxes
 
$
153,945

 
$
136,505

 
$
115,186

 
 
 
 
 
 
 
Net income available to common shareholders
 
$
107,663

 
$
66,168

 
$
51,734

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

 
5,440

 
12,034

Add: Impairment - net of tax (b)
 
4,415

 
4,916

 
2,475

Add: Purchase accounting adjustments - net of tax (c)
 
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
 
$
117,282

 
$
85,301

 
$
66,243

 
 
 
 
 
 
 
(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 purchase accounting adjustments 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 purchase accounting adjustments, stucco-related charges and impairment charges have on housing gross margins; the impact that the purchase accounting adjustments,

37



acquisition and integration costs, stucco-related charges and impairment charges have on income before income taxes; and that the purchase accounting adjustments, acquisition 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, 2018 Compared to Year Ended December 31, 2017
The calculation of adjusted housing gross margin (referred to below), which we believe provides a clearer measure of the ongoing performance of our business, is described and reconciled to housing gross margin, the financial measure that is calculated using our GAAP results, below under “Segment Non-GAAP Financial Measures.”
Midwest Region. During the twelve months ended December 31, 2018, homebuilding revenue in our Midwest region increased $190.5 million, from $742.6 million in 2017 to $933.1 million in 2018. This 26% increase in homebuilding revenue was the result of a 21% increase in the number of homes delivered (410 units, which benefited from our new Detroit division) and a 4% increase in the average sales price of homes delivered ($15,000 per home delivered), offset partially by a $3.0 million decrease in land sale revenue. Operating income in our Midwest region increased $4.6 million, from $81.5 million in 2017 to $86.1 million in 2018. The increase in operating income was primarily the result of a $16.1 million increase in our gross margin, offset, in part, by an $11.5 million increase in selling, general, and administrative expense. With respect to our homebuilding gross margin, our housing gross margin improved $16.5 million, due to the 21% increase in the number of homes delivered and the 4% increase in the average sales price of homes delivered noted above. Our housing gross margin percentage declined 240 basis points from 20.1% in 2017 to 17.7% in 2018. Our housing gross margin in 2018 was unfavorably impacted by a $5.1 million charge for purchase accounting adjustments related to our acquisition of Pinnacle Homes in Detroit, Michigan on March 1, 2018 and $0.3 million in asset impairment charges. Exclusive of these charges in 2018, our adjusted housing gross margin percentage in 2018 declined 180 basis points from 2017 (during which we experienced no comparable charges) from 20.1% in 2017 to 18.3% in 2018 primarily due to increased lot and construction costs as well as a change in product type and market mix of homes delivered compared to the prior year. Our land sale gross margin declined $0.4 million in the twelve months ended December 31, 2018 compared to the same period in 2017 as a result of fewer strategic land sales made in the current year compared to the prior year.
Selling, general and administrative expense increased $11.5 million, from $67.6 million in 2017 to $79.1 million in 2018, and declined as a percentage of revenue to 8.5% in 2018 compared to 9.1% in 2017. The increase in selling, general and administrative expense was attributable, in part, to an $8.1 million increase in selling expense, due to (1) a $6.3 million increase in variable selling expenses resulting from increases in sales commissions produced by the higher average sales price of homes delivered and increased number of homes delivered, $2.5 million of which was associated with our new Detroit division, and (2) a $1.8 million increase in non-variable selling expenses primarily related to costs associated with our additional sales offices and models used by our new Detroit division. The increase in selling, general and administrative expense was also attributable to a $3.4 million increase in general and administrative expense, which was primarily related to incremental costs from our Detroit acquisition.
During 2018, we experienced an 17% increase in new contracts in our Midwest region, from 1,978 in 2017 to 2,306 in 2018, and a 12% increase in backlog from 828 homes at December 31, 2017 to 930 homes at December 31, 2018. The increases in new contracts and backlog were attributable to (1) improving demand in our newer communities compared to prior year, (2) an increase in our average number of communities during the period, and (3) the addition of homes from our recent acquisition of Pinnacle Homes in Detroit, Michigan on March 1, 2018. Average sales price in backlog increased to $441,000 at December 31, 2018 compared to $415,000 at December 31, 2017 which was primarily due to product type and market mix in 2018 compared to prior year. During the twelve months ended December 31, 2018, we opened 26 new communities in our Midwest region (excluding the 10 communities added as part of our acquisition in Detroit) compared to 27 during 2017. Our monthly absorption rate in our Midwest region declined to 2.3 per community in 2018, compared to 2.6 per community in 2017, due primarily to the slowing in demand during the second half of 2018.
Southern Region. For the twelve months ended December 31, 2018, homebuilding revenue in our Southern region increased $194.9 million, from $730.5 million in 2017 to $925.4 million in 2018. This 27% increase in homebuilding revenue was primarily the result of a 22% increase in the number of homes delivered (471 units) and a 4% increase in the average sales price of homes delivered ($13,000 per home delivered), partially offset by a $0.3 million decrease in land sale revenue. Operating income in our Southern region increased $35.8 million from $36.8 million in 2017 to $72.6 million in 2018. This increase in operating income

38



was the result of a $48.8 million improvement in our gross margin, offset, in part, by a $13.0 million increase in selling, general, and administrative expense. With respect to our homebuilding gross margin, our gross margin on homes delivered improved $48.9 million, due primarily to the 22% increase in the number of homes delivered, the 4% increase in the average sales price of homes delivered, the absence of $8.5 million in charges for stucco-related repair costs in certain of our Florida communities taken during 2017 (as more fully discussed in Note 8), and the $3.2 million decline in pre-tax impairment charges recorded in 2018 compared to prior year. Our housing gross margin percentage improved 180 basis points from 16.4% in prior year's twelve month period to 18.2% for the same period in 2018. Exclusive of the impairment charges in both 2018 and 2017 and the stucco-related charges in 2017, our adjusted housing gross margin percentage improved 10 basis points from 18.6% in 2017 to 18.7% in the twelve months ended December 31, 2018 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 $0.1 million as a result of fewer strategic land sales in the twelve months ended December 31, 2018 compared to the same period in 2017.
Selling, general and administrative expense increased $13.0 million from $82.9 million in 2017 to $95.9 million in 2018 but declined as a percentage of revenue to 10.4% in 2018 from 11.4% in 2017. The increase in selling, general and administrative expense was attributable, in part, to a $10.0 million increase in selling expense due to (1) an $8.9 million increase in variable selling expenses resulting from increases in sales commissions produced by the higher number of homes delivered and the higher average sales price of homes delivered, and (2) a $1.1 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 also attributable to a $3.0 million increase in general and administrative expense, which was primarily related to a $1.9 million increase in compensation expense due to an increase in employee count as well as higher incentive compensation due to improved operating results, a $0.9 million increase in professional fees, and a $0.2 million increase in other miscellaneous expenses.
During 2018, we experienced a 15% increase in new contracts in our Southern region, from 2,342 in 2017 to 2,697 in 2018, and a 13% increase in backlog from 908 homes at December 31, 2017 to 1,026 homes at December 31, 2018. The increases in new contracts and backlog were primarily 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 increased to $373,000 at December 31, 2018 from $365,000 at December 31, 2017 primarily due to a change in product type and market mix. During 2018, we opened 32 communities in our Southern region compared to 31 in 2017. Our monthly absorption rate in our Southern region improved to 2.5 per community in 2018 from 2.3 per community in 2017.
Mid-Atlantic Region. For the twelve months ended December 31, 2018, homebuilding revenue in our Mid-Atlantic region decreased $63.6 million from $439.2 million in 2017 to $375.6 million in 2018. This 14% decrease in homebuilding revenue was the result of an 18% decrease in the number of homes delivered (192 units), primarily due to a decrease in the average number of communities during the period compared to prior year as a result of delayed new replacement community openings due, in part, to two hurricanes and unusually heavy rainfall during 2018 that temporarily disrupted operations, and a $13.5 million decrease in land sale revenue compared to prior year, partially offset by a 7% increase in the average sales price of homes delivered ($28,000 per home delivered). Operating income in our Mid-Atlantic region decreased $12.3 million, from $35.6 million in 2017 to $23.3 million in 2018. This decrease in operating income was primarily the result of a $16.9 million decrease in our gross margin, partially offset by a $4.6 million decrease in selling, general and administrative expense. With respect to our homebuilding gross margin, our housing gross margin declined $16.6 million due primarily to the 18% decrease in the number of homes delivered and a decline in housing gross margin percentage, partially attributable to delayed openings of new replacement communities. Our housing gross margin percentage declined by 210 basis points from 17.7% in 2017 to 15.6% in 2018. We had $1.0 million in asset impairment charges in 2018 and no asset impairment charges in 2017. Exclusive of these charges in 2018, our adjusted housing gross margin percentage declined 180 basis points from 17.7% in 2017 to 15.9% in 2018 as a result of increased construction and lot costs as well as the mix of homes delivered by type and by market. Our land sale gross margin declined $0.3 million in the twelve months ended December 31, 2018 compared to the same period in 2017 due to fewer strategic land sales in the current year compared to the prior year.
Selling, general and administrative expense declined $4.6 million from $39.2 million in 2017 to $34.6 million in 2018, but increased as a percentage of revenue to 9.2% in 2018 from 8.9% in 2017. Selling expense decreased $3.4 million due to a $2.6 million decrease in variable selling expenses resulting from reduced sales commissions as a result of the lower number of homes delivered during the period compared to prior year, as well as an $0.8 million decrease in non-variable selling expenses resulting from the reduction in costs associated with our sales offices and models as a result of the decline in community count. General and administrative expense decreased $1.2 million primarily related to a decrease in compensation and incentive-based compensation expense as a result of a decline in headcount and declining operating results.
During the twelve months ended December 31, 2018, we experienced a 14% decrease in new contracts in our Mid-Atlantic region, from 979 in 2017 to 842 in 2018, and a 14% decrease in the number of homes in backlog from 278 homes at December 31, 2017

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to 238 homes at December 31, 2018. The decreases in new contracts and backlog were primarily due to a decrease in the average number of active communities during the period compared to the prior year, and partly as a result of delays in replacement community openings in the period compared to the prior year. Average sales price of homes in backlog increased, however, from $416,000 at December 31, 2017 to $437,000 at December 31, 2018 primarily due to a change in product type and market mix. We opened nine communities in our Mid-Atlantic region during the twelve months ended December 31, 2018, the same number as we opened during 2017. Our monthly absorption rate in our Mid-Atlantic region remained flat at 2.4 per community in both 2018 and 2017.
Financial Services. Revenue from our mortgage and title operations increased $2.5 million, or 5%, from $49.7 million for the twelve months ended December 31, 2017 to a record $52.2 million for the twelve months ended December 31, 2018 as a result of a 9% increase in the number of loan originations, from 3,632 in 2017 to 3,964 in 2018, and an increase in the average loan amount from $297,000 in 2017 to $303,000 in 2018. In addition, we experienced an increase in the volume of loans sold and a gain from the sale of a portion of our servicing portfolio during 2018, but experienced lower margins on loans sold in 2018 than we experienced in prior year due to increased competitive pressures.
Our financial service operations ended 2018 with a $0.2 million increase in operating income compared to 2017, which was primarily due to the increase in our revenue discussed above, offset, in part, by a $2.3 million increase in selling, general and administrative expense compared to 2017, which 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, 2018, M/I Financial provided financing services in all of our markets. Approximately 80% of our homes delivered during 2018 were financed through M/I Financial, compared to 81% during 2017. 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 $3.9 million, from $42.5 million in 2017 to $46.4 million in 2018. The increase was primarily due to a $1.4 million increase related to costs associated with new information systems, a $0.7 million increase in professional fees, a $0.6 million increase in compensation expense, and a $1.2 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.
Earnings from Joint Venture Arrangements. Earnings from joint venture arrangements represents our portion of pre-tax earnings from our joint ownership and development agreements, joint ventures and other similar arrangements. In 2018 and 2017, the Company earned $0.3 million and $0.5 million, respectively, in equity income from joint venture arrangements.
Interest Expense - Net. Interest expense for the Company increased $1.6 million from $18.9 million in the twelve months ended December 31, 2017 to $20.5 million in the twelve months ended December 31, 2018. This increase was primarily the result of an increase in our weighted average borrowings from $678.2 million in 2017 to $801.0 million in 2018, in addition to an increase in our weighted average borrowing rate from 5.99% in 2017 to 6.22% in the 2018. The increase in our weighted average borrowings and our weighted average borrowing rate primarily related to the issuance of our $250.0 million in aggregate principal amount of 5.625% Senior Notes due 2025 (the “2025 Senior Notes”) during the third quarter of 2017 in addition to increased borrowings under our Credit Facility (as defined below) during 2018 compared to 2017, partially offset by the maturity of our 3.25% Convertible Senior Subordinated Notes due 2017 (the “2017 Convertible Senior Subordinated Notes”) in September 2017 and our 3.0% Convertible Senior Subordinated Notes due 2018 (the “2018 Convertible Senior Subordinated Notes”) in March 2018 as well as higher capitalized interest related to our increased land development and home construction during 2018 compared to prior year.
Income Taxes. Our overall effective tax rate was 23.8% for the year ended December 31, 2018 and 40.1% for the year ended December 31, 2017. The decline in the effective rate for the twelve months ended December 31, 2018 was primarily attributable to the decrease in the corporate income tax rate from 35% to 21% partially offset by the repeal of the domestic production activity deduction, both of which are the result of the enactment of the 2017 Tax Act during the fourth quarter of 2017. In addition, during the quarter ended June 30, 2018, we recorded a $3.0 million tax benefit primarily related to the retroactive reinstatement of energy efficient homes tax credits to 2017 for which we obtained certifications in 2018 (please see Note 14 to our financial statements for more information).

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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)
2018
 
2017
 
2016
 
 
 
 
 
 
Midwest region:
 
 
 
 
 
Housing revenue
$
932,248

 
$
738,743

 
$
631,772

Housing cost of sales
767,445

 
590,423

 
506,652

 
 
 
 
 
 
Housing gross margin
164,803

 
148,320

 
125,120

Add: Impairment (a)
273

 

 
253

Add: Purchase accounting adjustments (b)
5,147

 

 
1,081

 
 
 
 
 
 
Adjusted housing gross margin
$
170,223

 
$
148,320

 
$
126,454

 
 
 
 
 
 
Housing gross margin percentage
17.7
%
 
20.1
%
 
19.8
%
Adjusted housing gross margin percentage
18.3
%
 
20.1
%
 
20.0
%
 
 
 
 
 
 
Southern region:
 
 
 
 
 
Housing revenue
$
915,945

 
$
720,704

 
$
583,817

Housing cost of sales
748,911

 
602,585

 
498,314

 
 
 
 
 
 
Housing gross margin
167,034

 
118,119

 
85,503

Add: Impairment (