Executive Summary / Key Takeaways

• M/I Homes demonstrates financial resilience with a record $3 billion in shareholders' equity and a negative net debt-to-capital ratio, providing a strong buffer against market volatility.
• Despite a challenging macroeconomic backdrop marked by elevated interest rates and cautious consumer sentiment, the company achieved solid Q1 2025 results, including a robust 15% pre-tax income margin and 19% return on equity.
• Strategic flexibility, particularly the increased focus on spec homes and targeted mortgage rate buydowns, is a key operational lever enabling MHO to drive sales pace and manage inventory effectively in the current environment.
• MHO maintains a disciplined land strategy, controlling a significant ~6-year supply of lots with a focus on premier locations, while avoiding institutional land banking, positioning it for future community count growth and market share gains.
• While management anticipates continued gross margin pressure in 2025 due to ongoing incentive usage, the company expects to deliver a "solid year," underpinned by operational efficiencies and the long-term tailwinds of housing undersupply and favorable demographics.

M/I Homes, Inc. (NYSE: MHO) stands as a prominent single-family homebuilder with a history stretching back to 1976. Operating across 17 markets in 10 states, the company has built a diversified footprint, strategically expanding its presence over decades, including notable acquisitions like Pinnacle Homes in Detroit in 2018. This history has shaped a business model focused on both entry-level buyers through its Smart Series product line and move-up customers, offering a breadth of product types, including an increasing focus on attached townhomes to address affordability and density needs.

The homebuilding industry currently operates within a complex macroeconomic landscape. Elevated mortgage interest rates, persistent inflation concerns, and broader geopolitical uncertainties have collectively dampened consumer confidence and created a choppy demand environment. Despite these headwinds, fundamental long-term drivers such as a significant undersupply of housing across most U.S. markets, favorable demographic trends, and rising household formations continue to underpin the industry's potential. MHO's strategy is designed to navigate this duality, leveraging its established market presence and operational capabilities.

In this competitive arena, MHO faces off against national giants like D.R. Horton (DHI), NVR Inc. (NVR), and Lennar Corporation (LEN), alongside numerous regional and local builders. While lacking the sheer scale and efficiency advantages of DHI, which benefits from bulk purchasing and faster production cycles, MHO differentiates itself through integrated financial services via its wholly-owned subsidiary, MI Financial. This in-house capability provides a competitive edge by enabling faster, more seamless closings and facilitating targeted mortgage rate buydowns, a crucial tool in the current market. MHO's deep regional expertise in its core markets also allows for more nuanced land acquisition and development strategies compared to national players like NVR, which employs an asset-light land optioning model, or LEN, which is focusing on innovation and strategic asset management. MHO's vulnerabilities lie in its smaller scale, which can lead to higher per-unit operating costs compared to larger rivals, and a less pronounced focus on cutting-edge product technology innovation compared to players like LEN. However, MHO's disciplined land strategy, focusing on premier locations and developing approximately 80% of its own sites, helps mitigate some of the cost pressures and execution risks inherent in land acquisition and development.

Information available does not detail specific technological differentiators related to home construction materials or smart home features; however, MHO's operational technology plays a role in its business. Increases in general and administrative expenses in Q1 2025 were partly attributed to costs associated with information systems, indicating ongoing investment in its operational backbone. More significantly, the technology and systems within MI Financial are foundational to its ability to originate loans efficiently, manage interest rate risk through hedging instruments like interest rate lock commitments (IRLCs) and forward sales of mortgage-backed securities (FMBSs), and execute targeted mortgage rate buydowns. These capabilities enable MI Financial to achieve high capture rates (92% in Q1 2025), directly supporting home sales and providing a competitive advantage in offering financing solutions tailored to current market conditions. The ability to quickly implement and manage these financing incentives, particularly for spec homes designed for rapid closing, is a tangible benefit derived from the financial services segment's operational technology.

Performance and Financial Strength

M/I Homes' recent financial performance reflects the challenging yet still profitable operating environment. For the first quarter of 2025, the company reported total revenue of $976.1 million, a 7% decrease from $1.05 billion in the first quarter of 2024. This decline was primarily driven by an 8% decrease in homes delivered (1,976 in Q1 2025 vs. 2,158 in Q1 2024), partially offset by a 1% increase in the average sales price of homes delivered ($476,000 in Q1 2025 vs. $471,000 in Q1 2024). The impact of increased sales incentives and closing costs was notable, totaling $40 million in Q1 2025 compared to $24.8 million in the prior-year quarter, directly influencing revenue realization.

Profitability metrics remained solid despite the revenue dip. The total gross margin decreased by $30.6 million year-over-year, with the homebuilding gross margin percentage declining by 170 basis points to 23.4% in Q1 2025 from 25.1% in Q1 2024. This margin compression was largely attributed to the decrease in deliveries and a $9.8 million increase in interest rate buydowns offered. However, management highlighted that the Q1 2025 gross margin of 25.9% (calculated as total revenue less land and housing costs) represented a sequential improvement over Q4 2024 (24.6%), indicating some pricing power and the positive impact of new community deliveries. Income before income taxes decreased by 19% to $146.1 million, resulting in a strong pre-tax income margin of 15%. Net income for the quarter was $111.2 million, or $3.98 per diluted share, compared to $138.1 million, or $4.78 per diluted share, in Q1 2024. The effective tax rate saw a slight increase to 23.9% from 23.4%, mainly due to a lower tax benefit from equity compensation.

The financial services segment, MI Financial, delivered a standout performance, achieving a quarterly record revenue of $31.5 million in Q1 2025, a 17% increase from $27.0 million in Q1 2024. Income before income taxes for this segment rose significantly by 31% to $16.1 million. This strong performance was driven by higher margins on loans sold, an increased average loan amount ($406,000 in Q1 2025 vs. $386,000 in Q1 2024), and an improved capture rate of 92% (up from 88% in Q1 2024), partially offset by a slight decrease in the number of loans originated.

Operationally, the company ended Q1 2025 with 226 active communities, an increase from 219 a year prior, reflecting the opening of 27 new communities during the quarter. However, the company-wide absorption pace declined to 3.4 sales per community per month from 3.9 in Q1 2024, indicative of the softer demand environment. The cancellation rate also saw an uptick to 9.9% from 8.3%. MHO ended the quarter with 4,800 homes under construction, including 2,385 not yet subject to a sales contract, demonstrating a continued focus on building spec inventory to facilitate quicker closings and the effective use of incentives.

MHO's balance sheet remains a significant strength. As of March 31, 2025, the company held $776.4 million in cash, cash equivalents, and restricted cash, with $776.1 million being unrestricted.

While this was a decrease from the end of 2024, it reflects the timing of land investments ($146 million in acquisitions and $101.6 million in development in Q1 2025) and share repurchases ($50.1 million in Q1 2025). The company's total notes payable stood at $928 million, with a manageable $228 million due within 12 months.

MHO had no borrowings outstanding under its $650 million unsecured revolving credit facility, leaving $580.6 million available, and was in compliance with all debt covenants, including maintaining a strong Consolidated Tangible Net Worth ($2.93 billion vs. $1.85 billion required) and a low leverage ratio (0.60 actual). Shareholders' equity reached an all-time record of $3 billion, translating to a record book value per share of $112. The homebuilding debt-to-capital ratio was a low 19%, and the net debt-to-capital ratio was negative, underscoring the company's exceptional financial health and liquidity position.

Outlook, Risks, and Competitive Positioning

Looking ahead, M/I Homes anticipates that the softer market conditions experienced in Q1 2025 will persist throughout the year. Management expects to continue utilizing mortgage interest rate buydowns and other incentives to drive sales, which will likely keep homebuilding gross margins under pressure, below the levels achieved in 2024 (full year 2024 margin was 26.6%). Despite this, the company expects to increase its average community count by approximately 5% in 2025 and believes it is well-positioned to deliver a "solid year." The effective tax rate is projected to remain around 23%. The company also plans to continue its consistent share repurchase program, leveraging its strong balance sheet.

Key risks to this outlook include the unpredictable nature of macroeconomic conditions, particularly fluctuations in mortgage interest rates and their impact on affordability and consumer confidence. Changes in U.S. trade policies could potentially impact construction costs, although no material impact was observed in Q1 2025. While labor availability was not an issue in Q1 2025, it remains a potential risk for the industry. Increased inventory levels in certain markets, partly driven by competitors' spec building, could intensify competition and pressure pricing and incentives. The company's reliance on estimates for inventory and joint venture valuations also introduces potential for future impairment charges if market conditions deteriorate significantly, although no such charges were recorded in Q1 2025.

In the competitive landscape, MHO's strategic positioning is defined by its strong balance sheet, disciplined land investment in premier locations, operational focus on build time efficiency (~140 days average), and the competitive advantage provided by its integrated financial services segment. While larger competitors like DHI benefit from scale efficiencies and NVR from its asset-light model and superior profitability metrics (higher net margins, ROIC, ROE), MHO's regional expertise and ability to offer targeted financing solutions through MI Financial (evidenced by the high capture rate and effective use of buydowns on spec homes) allow it to gain market share in its operating regions. MHO's margins, while potentially facing near-term pressure, have historically stood comparatively tall against peers, reflecting its focus on profitability over volume-first growth. The company's significant controlled land pipeline positions it for future growth in community count, a key driver of long-term revenue expansion, even as it carefully manages its owned inventory.

Conclusion

M/I Homes enters the current market environment from a position of significant financial strength, highlighted by record equity and ample liquidity. While facing undeniable headwinds from elevated interest rates and macroeconomic uncertainty, the company's strategic pivot towards increased spec building and targeted financing incentives, facilitated by its integrated MI Financial segment, provides operational flexibility to drive sales pace and manage inventory. The disciplined approach to land investment ensures a pipeline for future growth in desirable markets. Although management anticipates continued pressure on gross margins in 2025, the company's solid Q1 performance, robust profitability metrics, and strong balance sheet underpin the expectation for a solid year. For investors, MHO represents a well-managed homebuilder with a fortress balance sheet and strategic levers to navigate challenging conditions, poised to benefit from the favorable long-term dynamics of the U.S. housing market.