Homebuilder M/I Homes Can't Offer Dividend or Share Buybacks

by: Judy Weil

M/I Homes (NYSE:MHO) reports on its Q408 conference call that it has amended its bank credit facility. The amendment comes with a restriction from paying dividends or buying back shares:

Effective January 15, 2009, we amended our bank credit facility. This amendment makes certain covenants less restrictive such as tangible net worth being (inaudible) to $100 million. It requires collateral and reduces the facility to $150 million. It also prevents us from purchasing our public debt. The facility maturity date remains October 2010.

We are currently restricted from paying any dividends or repurchasing any stock due to our restricted payments basket covenant in our senior note agreement.

Bloomberg reported on Tuesday that banks are cutting lines of unused credit. The article mentioned that homebuilder Ryland Group (NYSE:RYL) had voluntarily cut its line for better terms. Would these dividend/buyback restrictions be among them?

Other key points from M/I Homes' earnings report:

On mortgages:

For the quarter 47% of our loans were conventional with 53% being FHA/VA. This compares to 90% and 10% respectively for 2007 the same period. Approximately 80% of our communities are now eligible for FHA financing.

We sell our mortgages along with their servicing to a number of secondary market investors. Our main investors in the fourth quarter were Citi Mortgage (NYSE:C), Wells Fargo (NYSE:WFC), Chase (NYSE:JPM) and Countrywide (NYSE:BAC). We have not repurchased any mortgages this year.

WSJ notes the trend for first-time buyers:

Clearly the strongest buying group is that group that does not have a house to sell and that has a very high credit score. We think that we have had very compelling marketing messages and propositions and we think we’ve got good communities and we think we priced them right to sell and we think that maybe one of the reasons why our sales comes really aren’t too bad.

Recently we’ve been selling about 40% first time buyers

Lennar (NYSE:LEN) has announced it is offering the same low mortgage interest rate. Builders seem to be in a rate war. M/I Homes (cont.):

Q: You guys have a AD for a 3.875% rate… How much are you having to spend to do that?

A: That’s not something that we’re going to disclose obviously, but we think it has been a very effective program for us. It’s been a very good traffic generator.


Q: You guys have definitely taken more realistic impairments… You’ve taken [on] 75% of your communities and other builders are still saying they’d only impaired like a third or 25%. I mean, I guess I wonder if that’s more statement of their less realistic, or if you think it’s because you guys are more [realistic]?

A: The easy answer is I hope they’re right. Because if they are then we got a lot to lift ahead of us.

Almost no specs in Fla.:

At the end of the quarter we had $70 million invested in specs, 142 of which were completed and 189 specs in various stages of construction. This translates into about three specs per community. And of the 431 total specs, 180 are in the Midwest, 11 are in Florida and 140 are in the mid-Atlantic. And at 9/30/08 we had 479 specs with an investment of $82 million.


To read the full conference call transcript, click here. Seeking Alpha offers excerpts from our free earnings transcripts every day. To view other excerpts or to add the service to your watchlist, click here.