Executive Summary / Key Takeaways

• Resilient Performance in a Challenging Market: M/I Homes demonstrated solid performance in the third quarter of 2025, achieving a record for homes delivered and maintaining a strong pretax income margin of 12% despite persistent macroeconomic headwinds and increased incentives.
• Strategic Leverage of Financial Services: The company's wholly-owned MI Financial segment is a critical differentiator, enabling aggressive mortgage rate buydowns that drive sales and achieve a record 93% capture rate, directly supporting homebuilding operations and profitability.
• Robust Balance Sheet and Capital Allocation: MHO boasts an all-time record $3.1 billion in shareholders' equity, zero borrowings on its $900 million credit facility, and a low homebuilding debt-to-capital ratio of 18%, providing significant financial flexibility for growth and share repurchases.
• Targeted Growth and Operational Efficiency: MHO is focused on disciplined community count growth (projected 5% increase in 2025) and operational improvements, including enhanced construction cycle times, to capitalize on long-term housing fundamentals like undersupply and household formation.
• Navigating Margin Pressures and Market Volatility: While gross margins have seen compression due to incentives and rising lot costs, management believes margins are "closer to the bottom," with stable construction costs and potential tailwinds from future interest rate declines.

A Foundation of Resilience: M/I Homes' Strategic Blueprint

M/I Homes, Inc. (NYSE:MHO), founded in 1976, has evolved into one of the nation's leading single-family homebuilders, operating across 17 diverse markets in the Midwest, South, and Southeast United States. The company's enduring strategy centers on a diversified product offering, including its "Smart Series" homes catering to first-time buyers, and a disciplined land acquisition approach. This historical journey has shaped MHO's current strategic responses to market dynamics, emphasizing operational agility and financial prudence.

MHO's competitive positioning is rooted in its integrated business model and regional focus. Unlike some larger national competitors like D.R. Horton or Lennar that prioritize sheer scale, MHO maintains a qualitative presence as a mid-tier player, balancing affordability and customization. The company's strength in integrated financial services, particularly through its wholly-owned MI Financial, provides a distinct competitive advantage. This allows MHO to offer flexible mortgage solutions, such as aggressive rate buydowns, directly to its homebuyers, a capability that average existing home sellers or even some competitors may lack. This integrated approach enhances customer loyalty and provides a one-stop solution for buyers.

While MHO does not highlight a specific, proprietary construction technology or material science as a core differentiator akin to advanced solar panel materials, its "technological" edge lies in its operational sophistication and strategic use of financial tools. The MI Financial segment is a prime example, acting as a critical operational differentiator. This internal mortgage and title operation allows MHO to nimbly react to market conditions by offering competitive mortgage rate buydowns, which are crucial for driving traffic and incentivizing sales in the current high-interest-rate environment. In the third quarter of 2025, MI Financial achieved a record 93% capture rate of MHO's business, up from 89% in the prior year, directly contributing to profitability and sales performance. This high capture rate, driven by tailored financing solutions, translates into tangible benefits, including improved sales velocity and enhanced overall profitability for the company.

Furthermore, MHO's continuous focus on operational efficiencies, such as improving construction cycle times, serves as a key differentiator. The company improved its cycle time by approximately ten days in the third quarter of 2025 compared to both the previous year and the first quarter of 2025. This efficiency helps manage costs and allows for quicker delivery of homes, particularly spec homes, which are essential for leveraging short-term rate buydowns. The company also invests in sales training and online lead generation, enhancing its ability to connect with buyers and convert leads into sales. These operational advantages, while not "technology" in the traditional sense, provide MHO with a competitive moat by optimizing its sales process, managing costs, and enhancing customer experience.

Financial Performance and Operational Acumen

M/I Homes delivered a solid financial performance in the third quarter of 2025, navigating a challenging macroeconomic landscape marked by elevated mortgage rates and affordability concerns. The company reported $140 million in pretax income, a 26% decrease from the record third quarter of 2024, but still representing a robust 12% pretax income percentage of revenue. Gross margins stood at 24%, contributing to a strong 16% return on equity. Total revenue for the quarter decreased marginally by 1% to $1.13 billion.

The homebuilding segment experienced a 1% decline in revenue in Q3 2025, primarily due to a 2% decrease in the average sales price of homes delivered, partially offset by a 1% increase in the number of homes delivered. This reflects the impact of increased sales incentives and closing costs, which reduced revenue and average sales price by $53.50 million in Q3 2025, compared to $39.60 million in Q3 2024. The homebuilding gross margin percentage declined by 360 basis points year-over-year to 21.50% in Q3 2025. This decline was primarily attributed to the decrease in average sales price, an $18.70 million increase in lot costs, and a $10.80 million increase in interest rate buydowns. Management noted that "the majority of that is due to mortgage rate buy downs".

In contrast, the Financial Services segment was a standout performer, achieving a record $34.6 million in revenue, a 16% increase from the prior year, and a record pretax income of $16.6 million, up 28%. This strong performance was driven by higher margins on loans sold, an improved capture rate, and an increase in loan originations. The segment's operating income increased by $3.4 million in Q3 2025, primarily due to this revenue growth.

Operationally, MHO delivered a record 2,296 homes in Q3 2025, a 1% increase year-over-year. However, new contracts decreased by 6% to 1,908, and the monthly sales pace averaged 2.7 homes per community, down from 3.2 homes in Q3 2024. The company's inventory management included recording $6 million of impairment charges and $1.60 million of land deposit write-offs in Q3 2025 to optimize its land portfolio. Construction costs for "sticks and bricks" were "relatively flat to down" in Q3 2025 compared to Q2 2025, providing some offset to other cost pressures.

Strong Balance Sheet and Strategic Flexibility

M/I Homes continues to boast an exceptionally strong balance sheet, which provides significant strategic flexibility in the current volatile market. At September 30, 2025, the company reported an all-time record of $3.1 billion in shareholders' equity, translating to a book value per share of $120, an increase of 15% from a year ago. The homebuilding debt-to-capital ratio stood at a healthy 18%, down from 20% in the prior year, and the net debt-to-capital ratio was negative 1%.

Liquidity remains robust, with $734.20 million in cash, cash equivalents, and restricted cash at the end of Q3 2025. The company's unsecured revolving credit facility was recently amended on September 18, 2025, increasing commitments to $900 million and extending its maturity to September 18, 2030. Crucially, MHO had no borrowings outstanding under this facility at quarter-end, with $809 million of available capacity. This strong financial position, further bolstered by a Moody's credit rating upgrade, positions MHO as one of the public homebuilders with the lowest debt levels.

MHO's capital allocation strategy includes consistent share repurchases. During the nine months ended September 30, 2025, the company repurchased 1.20 million common shares for $150.40 million, with $99.60 million remaining under its current authorization. Management emphasizes that "Job one is to grow the company... and to do so with a very strong balance sheet." This approach prioritizes long-term growth and financial stability over short-term market timing for repurchases.

Outlook and Strategic Initiatives

M/I Homes anticipates that the "softer market conditions observed in the first nine months of 2025 will continue through the remainder of the year." Despite these pressures, the company remains optimistic about the long-term fundamentals of the housing market, citing favorable demographic trends, rising household formations, and a persistent undersupply of homes.

The core of MHO's near-term strategy revolves around promoting sales through interest rate buydowns and other targeted incentives. Management expects to continue these efforts throughout 2025 to support affordability and stimulate demand. While this will likely lead to some gross margin compression compared to 2024, management believes margins are "a lot closer to the bottom" and could benefit if mortgage rates move closer to six percent, reducing the cost of buydowns and potentially "unlock[ing] the existing home market."

MHO plans to increase its average community count by approximately 5% in 2025 compared to 2024, ending Q3 2025 with 233 active communities. This growth is supported by a robust land position of approximately 50,600 lots under control, representing an estimated six-year supply. The company is prudently managing land investments and development expenditures, with land development costs stabilizing, although raw land costs continue to rise. MHO's strategic objectives for the remainder of 2025 include managing land spend and inventory levels, optimizing construction cycle times, managing overhead, and emphasizing customer service and product quality in premier locations.

Competitive Landscape and Risk Factors

M/I Homes operates in a highly competitive residential construction industry, facing direct competition from national builders like D.R. Horton (DHI), Lennar (LEN), PulteGroup (PHM), NVR (NVR), and Toll Brothers (TOL). While MHO may not match the sheer scale of DHI or LEN, its integrated financial services segment provides a significant competitive edge, allowing for agile and effective mortgage rate buydowns that directly influence sales. This capability helps MHO compete against rivals who might have more standardized offerings or less integrated financing.

MHO's focus on diverse buyer segments, including its Smart Series for first-time buyers, and its presence in 17 distinct markets, offers a degree of geographic diversification that helps mitigate regional downturns. While some competitors like Lennar emphasize technological integration in construction (e.g., modular building techniques), MHO's competitive advantage is more rooted in its operational efficiencies, such as improved cycle times, and its ability to leverage its financial services arm for market responsiveness. The company's disciplined land strategy, aiming for a 2- to 3-year owned supply complemented by option contracts, provides flexibility in managing land risk, contrasting with NVR's asset-light model or the more aggressive land strategies of some peers.

Despite its strengths, MHO faces several pertinent risks. The "housing market continues to face persistent macroeconomic challenges including elevated mortgage interest rates, affordability concerns and general economic uncertainties such as tariffs, inflation, job security and recession concerns." These factors can negatively impact homebuyer sentiment and demand, leading to increased incentives and pressure on gross margins. The company recorded $7.6 million in inventory impairment charges and land deposit write-offs in Q3 2025 due to ongoing market uncertainty. While MHO has not yet seen a significant impact from tariffs on construction costs, this remains a potential future headwind. Furthermore, local zoning regulations continue to be a "greatest impediment" to affordability and volume growth.

Conclusion

M/I Homes stands as a financially robust and strategically agile homebuilder, well-positioned to navigate the current "choppy and challenging" housing market. The company's core investment thesis is underpinned by its disciplined operational execution, particularly the strategic leverage of its integrated MI Financial services to drive sales through targeted mortgage rate buydowns. This operational differentiator, coupled with a strong balance sheet featuring record equity and ample liquidity, provides MHO with the resilience to withstand market headwinds and pursue profitable growth.

While gross margins have experienced compression due to market incentives and rising lot costs, management's confidence in margins being "closer to the bottom," alongside stable construction costs and the potential for future interest rate declines, suggests a more stable outlook. MHO's commitment to disciplined community count growth within its existing, diversified markets, and its focus on operational efficiencies like improved cycle times, positions it to capitalize on the enduring long-term fundamentals of housing demand. For discerning investors, M/I Homes offers a compelling blend of financial strength, strategic adaptability, and a clear roadmap for sustained performance in an evolving industry.