Management's Discussion of Results of Operations
(Excerpts) |
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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 114,800 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 certain communities in that market. 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. (see “- Results of Operations - Overview” for more information regarding our decision in the first quarter of 2019 to wind down our Washington D.C. operations). 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: • Information Relating to Forward-Looking Statements; • Application of Critical Accounting Estimates and Policies; • Results of Operations; • Discussion of Our Liquidity and Capital Resources; • Summary of Our Contractual Obligations; • Discussion of Our Utilization of Off-Balance Sheet Arrangements; and • Impact of Interest Rates and Inflation. RESULTS OF OPERATIONS During 2019, we decided to wind down our Washington, D.C. operations, which we expect to substantially complete by the end of 2019. As a result, during the second quarter of 2019, we re-evaluated our reportable segments and determined that none of our separate Mid-Atlantic operating segments met the reportable criteria set forth in ASC 280, Segment Reporting (“ASC 280”). Therefore, we elected to aggregate our Charlotte and Raleigh, North Carolina and Washington, D.C. operating segments into our existing Southern region based on the aggregation criteria described in Note 11. All prior year segment information has been recast to conform with the 2019 presentation. The change in the reportable segments has no effect on the Company's condensed consolidated balance sheets, statement of income or statement of cash flows for the periods presented. As a result of this re-evaluation, we have determined our reportable segments are: Northern homebuilding; Southern homebuilding; and financial services operations. The homebuilding operating segments that comprise each of our reportable segments are as follows: Northern Southern Chicago, Illinois Orlando, Florida Cincinnati, Ohio Sarasota, Florida Columbus, Ohio Tampa, Florida Indianapolis, Indiana Austin, Texas Minneapolis/St. Paul, Minnesota Dallas/Fort Worth, Texas Detroit, Michigan Houston, Texas San Antonio, Texas Charlotte, North Carolina Raleigh, North Carolina Washington, D.C. (a) (a) During 2019, we decided to wind down our Washington, D.C. operations, which we expect to substantially complete by the end of 2019. Overview For both the second quarter and first half of 2019, we achieved record levels of new contracts, homes delivered, revenue and net income. We also reached record-high income before income taxes of $41.2 million during 2019’s second quarter, increasing 23% over 2018’s $33.5 million. This improvement reflects higher homes delivered, a higher average closing price, improved overhead leverage and lower acquisition-related expenses in 2019, offset by a decline in gross margin percentage which is primarily due to rising labor costs. Our complementary financial services business also achieved record revenue in the second quarter and a record number of loans originated in both the second quarter and first half of 2019. Fundamental housing market factors were generally favorable in 2019's first half, with strong employment levels, relatively high consumer confidence and a limited supply of homes available for sale. We believe housing market conditions will remain relatively favorable during the remainder of 2019. However, we also believe rising land and labor costs may continue to impose pressure on affordability levels in many of our markets. Favorable market conditions along with the execution of our strategic business initiatives enabled us to achieve the following record results during the quarter and first half ended June 30, 2019 in comparison to the second quarter and first half of 2018: • New contracts increased 6% to1,731 and less than 1% to 3,375, respectively • Homes delivered increased 9% to 1,538 homes and 8% to 2,724 homes, respectively • Average sales price of homes delivered increased 1% to $389,000 and 3% to $391,000, respectively • Revenue increased 12% to $623.7 million and 11% to $1.1 billion, respectively • Number of active communities at June 30, 2019 increased 5% to 220 - an all-time record for the Company In addition to the record results described above, while not a second quarter record, our backlog sales value exceeded $1.12 billion at the end of the second quarter, and our company-wide absorption pace of sales per community for the second quarter of 2019 was 2.7 per month versus 2.6 per month for 2019’s first quarter. Summary of Company Financial Results The calculations of adjusted income before income taxes, adjusted net income, 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, 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 second quarter of 2019 increased 22.9% from $33.5 million in the second quarter of 2018 to $41.2 million in the second quarter 2019. Income before income taxes for the three months ended June 30, 2019 and 2018 was unfavorably impacted by $0.1 million and $3.0 million of acquisition-related charges as a result of our acquisition of Pinnacle Homes in March 2018, respectively. Excluding these acquisition-related charges for both the three months ended June 30, 2019 and 2018, adjusted income before income taxes increased 13% from $36.5 million in the second quarter of 2018 to $41.3 million in the second quarter 2019. For the six months ended June 30, 2019, income before income taxes increased 13% from $57.4 million for the first half of 2018 to $64.7 million. Income before income taxes for the six months ended June 30, 2019 was unfavorably impacted by $0.6 million of acquisition-related charges as a result of our acquisition of Pinnacle Homes in March 2018. Income before income taxes for the six months ended June 30, 2018 was unfavorably impacted by $3.9 million of acquisition-related charges and $1.7 million of acquisition and integration costs, which were incurred as a result of our acquisition of Pinnacle Homes. Excluding these acquisition-related charges for both the first half of 2019 and 2018, adjusted income before income taxes increased 4% from $63.0 million in 2018's first half to $65.2 million in 2019's first half. We achieved net income of $30.2 million, or $1.08 per diluted share, in 2019's second quarter, which included $0.1 million of pre-tax acquisition-related charges as discussed above. This compares to net income of $27.9 million, or $0.96 per diluted share, in 2018's second quarter, which included $3.0 million of pre-tax acquisition-related charges ($0.08 per diluted share) as discussed above. Exclusive of these charges in both periods, our adjusted net income increased $0.2 million to $30.3 million in the second quarter of 2019 compared to $30.1 million in the prior year. Our effective tax rate was 26.6% in 2019’s second quarter compared to 16.8% in 2018. In the first half of 2019, we achieved net income of $48.0 million, or $1.71 per diluted share, which included $0.6 million ($0.01 per diluted share) of pre-tax acquisition-related charges as discussed above. This compares to net income of $46.0 million, or $1.56 per diluted share, in the first half of 2018, which included $3.9 million of pre-tax acquisition-related charges and a $1.7 million charge for acquisition and integration costs (collectively $0.14 per diluted share) as discussed above. Exclusive of these acquisition-related charges in both periods, our adjusted net income decreased to $48.4 million in the first half of 2019 compared to $50.1 million in the prior year. Our effective tax rate was 25.8% in 2019’s the first half compared to 19.9% in 2018’s first half. During the quarter ended June 30, 2019, we recorded record second quarter total revenue of $623.7 million, of which $597.9 million was from homes delivered, $11.5 million was from land sales and $14.3 million was from our financial services operations. Revenue from homes delivered increased 10% in 2019's second quarter compared to the same period in 2018 driven primarily by a 9% increase in the number of homes delivered (129 units) and a 1% increase in the average sales price of homes delivered ($2,000 per home delivered). Revenue from land sales increased $10.3 million from the second quarter of 2018 primarily due to more land sales in our Southern region in 2019's second quarter compared to the prior year. Revenue from our financial services segment increased 20% to a second quarter record of $14.3 million in the second quarter of 2019 as a result of an increase in loans closed and sold in addition to improvement in margins on loans sold compared to 2018's second quarter. During the first half of 2019, we recorded record total revenue of $1.1 billion, of which $1.06 billion was from homes delivered, $14.5 million was from land sales and $26.1 million was from our financial services operations. Revenue from homes delivered increased 10% in 2019's first half compared to the same period in 2018 driven primarily by an 8% increase in the number of homes delivered (193 units) and a 3% increase in the average sales price of homes delivered ($10,000 per home delivered). Revenue from land sales increased 8.9 million from 2018's first half primarily due to more land sales in our Southern region in 2019's first six months compared to the prior year. Revenue from our financial services segment decreased 3% to $26.1 million in the first half of 2019 as a result of lower margins on loans sold during the period than we experienced in first half of 2018, primarily during the first quarter of 2019. Total gross margin (total revenue less total land and housing costs) increased $11.1 million in the second quarter of 2019 compared to the second quarter of 2018 as a result of an $8.7 million improvement in the gross margin of our homebuilding operations and a $2.4 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 $8.4 million as a result of the 9% increase in the number of homes delivered and the 1% increase in the average sales price of homes delivered. Our housing gross margin percentage declined 20 basis points from 17.8% in prior year's second quarter to 17.6% in 2019's second quarter. Exclusive of the $0.1 million and $3.0 million of acquisition-related charges (as discussed above) taken in the second quarter of 2019 and 2018, respectively, our adjusted housing gross margin percentage declined 70 basis points from 18.3% in prior year's second quarter to 17.6% in 2019's second quarter, primarily as a result of the mix of homes delivered during 2019's second quarter compared to the same period in the prior year as well as higher lot costs when compared to the same period in 2018. Our gross margin on land sales (land sale gross margin) improved $0.3 million as a result of more third party land sales in the second quarter of 2019 compared to the second quarter of 2018. The gross margin of our financial services operations increased $2.4 million in the second quarter compared to the second quarter of 2018 as a result of an increase in loans closed and sold in addition to improvement in margins on loans sold. Total gross margin increased $14.6 million in the first half of 2019 compared to the first half of 2018 as a result of a $15.4 million improvement in the gross margin of our homebuilding operations, offset partially by a $0.8 million decline in the gross margin of our financial services operations. With respect to our homebuilding gross margin, our gross margin on homes delivered improved $15.4 million as a result of the 8% increase in the number of homes delivered and the 3% increase in the average sales price of homes delivered. Our housing gross margin percentage declined 20 basis points from 17.7% in prior year's first half to 17.5% in 2019's first six month period. Exclusive of the $0.6 million and $3.9 million of acquisition-related charges (as discussed above) taken in the first half of 2019 and 2018, respectively, our adjusted housing gross margin percentage declined 60 basis points from 18.1% in the prior year’s first half to 17.5% in 2019's first six months, primarily as a result of the mix of homes delivered during the first half of 2019 compared to the same period in the prior year as well as higher lot costs when compared to the same period in 2018. Our gross margin on land sales remained flat in 2019's first six months compared to 2018's first six months. The gross margin of our financial services operations decreased $0.8 million in the first half of 2019 compared to the first half of 2018 as a result of a decline in margins on loans sold, offset in part by increases in the number of loan originations and the average loan amount. We opened 42 new communities during the first half of 2019. 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 quarter to quarter depending on the mix of communities delivering homes. For the three months ended June 30, 2019, selling, general and administrative expense increased $3.4 million, which partially offset the increase in our gross margin dollars discussed above, but declined as a percentage of revenue from 12.6% in the second quarter of 2018 to 11.8% in the second quarter of 2019. Selling expense increased $1.9 million from 2018's second quarter but improved as a percentage of revenue to 6.0% in 2019's second quarter compared to 6.4% for the same period in 2018. Variable selling expense for sales commissions contributed $1.7 million to the increase due to the higher average sales price of homes delivered and the higher number of homes delivered in the quarter. The increase in selling expense was also attributable to a $0.2 million increase in non-variable selling expense primarily related to costs associated with our sales offices and models as a result of our increased average community count. General and administrative expense increased $1.5 million compared to the second quarter of 2018 but declined as a percentage of revenue from 6.2% in the second quarter of 2018 to 5.8% in the second quarter of 2019. The dollar increase in general and administrative expense was primarily due to a $1.0 million increase in land related expenses due to the increase in average community count and a $0.5 million increase in compensation related expenses due to our increased headcount. For the six months ended June 30, 2019, selling, general and administrative expense increased $7.6 million, which partially offset the increase in our gross margin dollars discussed above, but declined as a percentage of revenue from 12.9% in the six months ended June 30, 2018 to 12.3% in the first six months of 2019. Selling expense increased $3.3 million from the first half of 2018 but improved as a percentage of revenue to 6.2% in 2019’s first six months compared to 6.6% for the same period in 2018. Variable selling expense for sales commissions contributed $2.6 million to the increase due to the higher average sales price of homes delivered and the higher number of homes delivered year to date. The increase in selling expense was also attributable to a $0.7 million increase in non-variable selling expense primarily related to costs associated with our sales offices and models as a result of our increased average community count. General and administrative expense increased $4.3 million compared to the first half of 2018 but declined as a percentage of revenue from 6.3% in the first half of 2018 to 6.1% in the first half of 2019. The dollar increase in general and administrative expense was primarily due to a $1.8 million increase in land related expenses due to our higher average community count, a $1.5 million increase in compensation related expenses due to our increased headcount, a $0.6 million increase in costs associated with new information systems, and a $0.4 million increase related to employee severance benefits as a result of the wind down of our Washington, D.C. operations. Outlook During the first half of 2019, mortgage interest rates moderated, which we believe provided a catalyst for improved consumer confidence and demand for new homes. We continue to believe that the basic underlying housing market fundamentals of low unemployment, higher wages and low inventory levels remain favorable. We remain sensitive to changes in market conditions, with a continuing focus 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, and investing in attractive land opportunities in order to increase our number of active communities. We expect to continue to emphasize the following strategic business objectives throughout the remainder of 2019: • profitably growing our presence in our existing markets, including opening new communities; • expanding the availability of our more affordable Smart Series homes; • opportunistically reviewing potential new markets; • 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 during the first six months of 2019 for continued improvement in our financial and operating results in 2019 and beyond, including investing $166.3 million in land acquisitions and $116.7 million in land development to help grow our presence in our existing markets. We currently estimate that we will spend approximately $550 million to $600 million on land purchases and land development in 2019, including the $283.0 million spent during the first six months of 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 opened 42 communities and closed 31 communities in the first half of 2019, ending the first six months of 2019 with a total of 220 communities compared to 209 communities at June 30, 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. 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 Seasonality Typically, 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 compared to the first 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 loan originations correspond with the delivery of homes in our homebuilding operations. Non-GAAP Financial Measures This report contains information about our adjusted housing gross margin, adjusted income before income taxes and adjusted net income each of which constitutes a non-GAAP financial measure. Because adjusted housing gross margin, adjusted income before income taxes and adjusted net income 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. 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. We believe adjusted housing gross margin, adjusted income before income taxes and adjusted net income 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 we generated specifically on our operations during a given period. These non-GAAP financial measures isolate the impact that the acquisition-related charges have on housing gross margins, and that the acquisition-related charges and acquisition and integration expenses have on income before income taxes and net income, and allow investors to make comparisons with our competitors that adjust housing gross margins, income before income taxes, and net income 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 Comparison Three Months Ended June 30, 2019 Compared to Three Months Ended June 30, 2018 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.” Northern Region. During the three months ended June 30, 2019, homebuilding revenue in our Northern region increased $26.0 million, from $226.9 million in the second quarter of 2018 to $252.9 million in the second quarter of 2019. This 11% increase in homebuilding revenue was the result of an 11% increase in the number of homes delivered (60 units) and an increase in the average sales price of homes delivered ($3,000 per home delivered). Operating income in our Northern region increased $5.4 million from $19.0 million in the second quarter of 2018 to $24.4 million during the quarter ended June 30, 2019. This increase in operating income was the result of a $6.4 million improvement in our gross margin, offset partially by a $1.0 million increase in selling, general, and administrative expense. With respect to our homebuilding gross margin, our housing gross margin improved $6.5 million due to the increases in the number of homes delivered and average sales price of homes delivered noted above. Our housing gross margin percentage improved 90 basis points to 17.9% in the second quarter of 2019 from 17.0% in the prior year’s second quarter. Exclusive of the $0.1 million and $3.0 million of acquisition-related charges taken during the second quarter of 2019 and 2018, respectively, related to our acquisition of Pinnacle Homes in Detroit, Michigan on March 1, 2018, our adjusted housing gross margin for the second quarter of 2019 declined 50 basis points to 17.9% compared to 18.4% for the second quarter of 2018. The decline in housing gross margin percentage was primarily due to changes in product type and market mix of homes delivered as well as higher lot costs compared to 2018's same period. Our land sale gross margin declined $0.1 million due to fewer strategic land sales in the second quarter of 2019 compared to the same period in 2018. Selling, general and administrative expense increased $1.0 million, from $19.7 million for the quarter ended June 30, 2018 to $20.7 million for the quarter ended June 30, 2019, and declined as a percentage of revenue to 8.2% in 2019's second quarter from 8.7% in 2018's second quarter. The increase in selling, general and administrative expense was attributable to a $0.4 million increase in selling expense, primarily due to an increase in variable selling expenses resulting from increases in sales commissions produced by the higher number of homes delivered and higher average sales price of homes delivered, and a $0.6 million increase in general and administrative expense primarily related to an increase in land related expenses. During the three months ended June 30, 2019, we experienced a 7% increase in new contracts in our Northern region, from 656 in the second quarter of 2018 to 703 in the second quarter of 2019. The increase in new contracts was partially due to improving demand in our newer communities compared to prior year and an increase in our average number of communities during the period. Homes in backlog, however, decreased 6% from 1,330 homes at June 30, 2018 to 1,247 homes at June 30, 2019. Average sales price in backlog increased to $424,000 at June 30, 2019 compared to $420,000 at June 30, 2018 which was primarily due to changes in product type and market mix. During the three months ended June 30, 2019, we opened four new communities in our Northern region compared to four during 2018's second quarter. Our monthly absorption rate in our Northern region was 2.6 per community in the second quarter of 2019, the same as in 2018's second quarter. Southern Region. During the three month period ended June 30, 2019, homebuilding revenue in our Southern region increased $37.2 million, from $319.3 million in the second quarter of 2018 to $356.5 million in the second quarter of 2019. This 12% increase in homebuilding revenue was the result of an 8% increase in the number of homes delivered (69 units) and a slight increase in the average sales price of homes delivered ($1,000 per home delivered). Operating income in our Southern region increased $1.7 million from $24.5 million in the second quarter of 2018 to $26.2 million during the quarter ended June 30, 2019. This increase in operating income was the result of a $2.2 million improvement in our gross margin, partially offset by a $0.5 million increase in selling, general, and administrative expense. With respect to our homebuilding gross margin, our housing gross margin improved $1.8 million, due primarily to the 8% increase in the number of homes delivered noted above. Our housing gross margin percentage declined from 18.3% in prior year’s second quarter to 17.4% in the second quarter of 2019, largely due to the mix of communities delivering homes and rising lot costs. Our land sale gross margin improved $0.4 million due to more strategic land sales in the second quarter of 2019 compared to the second quarter of 2018. We did not record any additional warranty charges for stucco-related repair costs in our Florida communities during the second quarter of 2019. With respect to this matter, during the quarter ended June 30, 2019, we identified 28 additional homes in need of repair and completed repairs on 27 homes, and, at June 30, 2019, we have 165 homes in various stages of repair. See Note 6 to our financial statements for further information. Selling, general and administrative expense increased $0.5 million from $33.7 million in the second quarter of 2018 to $34.2 million in the second quarter of 2019 but declined as a percentage of revenue to 9.6% from 10.6% in the second quarter of 2018. The increase in selling, general and administrative expense was attributable to a $1.6 million increase in selling expense primarily due to an increase in variable selling expenses resulting from increases in sales commissions produced by the higher number of homes delivered and higher average sales price of homes delivered. The increase in selling expense was partially offset by a $1.1 million decrease in general and administrative expense, which was primarily related to a $0.7 million decrease in professional fees and a $0.6 million decrease in incentive compensation expense offset, in part, by a $0.2 million increase in land abandonment charges. During the three months ended June 30, 2019, we experienced a 5% increase in new contracts in our Southern region, from 975 in the second quarter of 2018 to 1,028 in the second quarter of 2019. The increase in new contracts was primarily due to changes in product type and market mix and due to an increase in our average number of communities during the period. Homes in backlog decreased 2% from 1,636 homes at June 30, 2018 to 1,598 homes at June 30, 2019. Average sales price in backlog decreased to $373,000 at June 30, 2019 from $377,000 at June 30, 2018 due to changes in product type and market mix. During the three months ended June 30, 2019, we opened 20 communities in our Southern region compared to 12 during 2018's second quarter. Our monthly absorption rate in our Southern region was 2.7 per community in the second quarter of 2019, the same as in the second quarter of 2018. Financial Services. Revenue from our mortgage and title operations increased $2.4 million to a second quarter record of $14.3 million in the second quarter of 2019 from $11.9 million in the second quarter of 2018 due to an increase in loans closed and sold in addition to improvement in margins on loans sold. We experienced a 12% increase in the number of loan originations, from 930 in the second quarter of 2018 to 1,037 in the second quarter of 2019, and an increase in the average loan amount from $306,000 in the quarter ended June 30, 2018 to $308,000 in the quarter ended June 30, 2019. We experienced a $1.7 million increase in operating income in the second quarter of 2019 compared to 2018's second quarter, which was primarily due to the increase in revenue discussed above, offset partially by a $0.7 million increase in selling, general and administrative expense compared to the second quarter of 2018. This increase was primarily due to an increase in compensation expense related to our increase in employee headcount due to new mortgage and title locations as well as an increase in professional fees. At June 30, 2019, M/I Financial provided financing services in all of our markets. Approximately 79% of our homes delivered during the second quarter of 2019 were financed through M/I Financial, compared to 80% in the second quarter of 2018. Capture rate is influenced by financing availability and competition in the mortgage market, and can fluctuate from quarter to quarter. Corporate Selling, General and Administrative Expense. Corporate selling, general and administrative expense increased $1.2 million from $10.9 million for the second quarter of 2018 to $12.1 million for the second quarter of 2019. This increase primarily resulted from a $1.0 million increase in base compensation expense due to our increased headcount from our new mortgage and title offices in certain markets and a $0.2 million increase in costs associated with new information systems. Equity in (Income) Loss from Joint Venture Arrangements. Earnings or loss from joint venture arrangements represent our portion of pre-tax earnings or loss from our joint ownership and development agreements, joint ventures and other similar arrangements. During the three months ended June 30, 2019, the Company earned $0.2 million in equity income from joint venture arrangements. During the three months ended June 30, 2018, the Company had less than $0.1 million in equity loss from joint venture arrangements. Interest Expense - Net. Interest expense for the Company increased $0.3 million from $4.9 million for the three months ended June 30, 2018 to $5.2 million for the three months ended June 30, 2019. This increase was primarily the result of an increase in average borrowings under our Credit Facility (as defined below) during the second quarter of 2019 compared to prior year. Our weighted average borrowings increased from $789.8 million in 2018's second quarter to $855.0 million in 2019's second quarter, and our weighted average borrowing rate increased from 6.18% in the second quarter of 2018 to 6.22% for second quarter of 2019. Income Taxes. Our overall effective tax rate was 26.6% for the three months ended June 30, 2019 and 16.8% for the same period in 2018. The increase in the effective rate from the three months ended June 30, 2018 was primarily attributable to a $3.0 million nonrecurring tax benefit taken during the quarter ended June 30, 2018 related to the retroactive reinstatement of energy efficient homes tax credits. Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018 Northern Region. During the first half of 2019, homebuilding revenue in our Northern region increased $67.7 million, from $385.5 million in the first six months of 2018 to $453.2 million in the first six months of 2019. This 18% increase in homebuilding revenue was the result of an 13% increase in the number of homes delivered (123 units, which benefited from our new Detroit division) and a 4% increase in the average sales price of homes delivered ($17,000 per home delivered) and a $0.7 million increase in land sale revenue. Operating income in our Northern region increased $9.8 million, from $31.2 million during the first half of 2018 to $41.0 million during the six months ended June 30, 2019. The increase in operating income was primarily the result of a $13.3 million increase in our gross margin, offset, in part, by an $3.5 million increase in selling, general, and administrative expense. With respect to our homebuilding gross margin, our housing gross margin improved $13.4 million, due to the 13% 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 improved 40 basis points from 17.2% in the prior year's first half to 17.6% for the same period in 2019. Our housing gross margin for the first six months of 2019 and 2018 was unfavorably impacted by $0.6 million and $3.9 million of acquisition-related charges, respectively, from our recent Detroit acquisition. Exclusive of the $0.6 million and $3.9 million of acquisition-related charges, our adjusted housing gross margin percentage declined 50 basis points to 17.7% for the first half of 2019 from 18.2% primarily due to a change in product type and market mix of homes delivered compared to the prior year as well as increased lot costs. Our land sale gross margin declined $0.2 million as a result of fewer strategic land sales in the first half of 2019 compared to the same period in 2018. Selling, general and administrative expense increased $3.5 million, from $35.2 million for the six months ended June 30, 2018 to $38.7 million for the six months ended June 30, 2019, but declined as a percentage of revenue to 8.5% compared to 9.1% for the same period in 2018. The increase in selling, general and administrative expense was attributable, in part, to a $2.1 million increase in selling expense due to (1) a $1.5 million increase in variable selling expenses resulting from increases in sales commissions produced by the higher average sales price of homes delivered and higher number of homes delivered, $0.6 million of which was associated with our new Detroit division, and (2) a $0.7 million increase in non-variable selling expenses primarily related to costs associated with our additional sales offices and models as a result of our increased community count, $0.4 million of which related to our new Detroit division. The increase in selling, general and administrative expense was also attributable to a $1.4 million increase in general and administrative expense, which was primarily related to an increase in land related expenses as well as incremental costs from our Detroit acquisition. During the six months ended June 30, 2019, we experienced a 4% increase in new contracts in our Northern region, from 1,354 in the six months ended June 30, 2018 to 1,405 in the first half of 2019 (which benefited from our new Detroit division). The increase in new contracts was due to improving demand in our newer communities compared to prior year and due to an increase in our average number of communities during the period. Homes in backlog decreased 6% from 1,330 homes at June 30, 2018 to 1,247 homes at June 30, 2019. Average sales price in backlog increased to $424,000 at June 30, 2019 compared to $420,000 at June 30, 2018 which was primarily due to product type and market mix. During the six months ended June 30, 2019, we opened eight new communities in our Northern region compared to 13 during 2018's first half (excluding the 10 communities added as part of our acquisition in Detroit). Our monthly absorption rate in our Northern region declined to 2.6 per community in the first half of 2019 from 2.8 per community in the first half of 2018. Southern Region. During the six months ended June 30, 2019, homebuilding revenue in our Southern region increased $42.0 million from $583.5 million in the first half of 2018 to $625.5 million in the first half of 2019. This 7% increase in homebuilding revenue was the result of a 4% increase in the number of homes delivered (70 units) and a 1% increase in the average sales price of homes delivered ($5,000 per home delivered), in addition to an $8.3 million increase in land sale revenue. Operating income in our Southern region increased $1.9 million from $41.9 million in the first half of 2018 to $43.8 million during the six months ended June 30, 2019. This increase in operating income was the result of a $2.1 million improvement in our gross margin offset by a $0.2 million increase in selling, general, and administrative expense. With respect to our homebuilding gross margin, our gross margin on homes delivered improved $2.0 million, due primarily to the 4% increase in the number of homes delivered and the 1% increase in the average sales price of homes delivered. Our housing gross margin percentage declined 60 basis points from 18.0% in prior year's first half to 17.4% in the same period in 2019, largely due to the mix of communities delivering homes and rising lot costs. Our land sale gross margin improved $0.1 million as a result of more strategic land sales in the first half of 2019 compared to the same period in 2018. Selling, general and administrative expense increased $0.2 million from $62.7 million in the first half of 2018 to $62.9 million in the first half of 2019 but declined as a percentage of revenue to 10.1% compared to 10.7% for the first half of 2018. The increase in selling, general and administrative expense was attributable to a $1.4 million increase in selling expense due to (1) a $1.2 million increase in variable selling expenses resulting from increases in sales commissions produced by the higher number of homes delivered and higher average sales price of homes delivered, and (2) a $0.2 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 expense was offset, in part, by a $1.2 million decrease in general and administrative expense, which was primarily related to a $0.8 million decrease in professional fees and a $0.7 million decrease in incentive compensation expense, partially offset by a $0.3 million increase in land related expenses. During the six months ended June 30, 2019, we experienced a 2% decrease in new contracts in our Southern region, from 2,016 in the six months ended June 30, 2018 to 1,970 in the first half of 2019, and a 2% decrease in backlog from 1,636 homes at June 30, 2018 to 1,598 homes at June 30, 2019. The decreases in new contracts and backlog were primarily due to changes in product type and market mix. Average sales price in backlog decreased from $377,000 at June 30, 2018 to $373,000 at June 30, 2019 due to a change in product type and market mix. During the six months ended June 30, 2019, we opened 34 communities in our Southern region compared to 25 during 2018's first half. Our monthly absorption rate in our Southern region declined to 2.6 per community in the first half of 2019 from 2.8 per community in the first half of 2018. Financial Services. Revenue from our mortgage and title operations decreased $0.8 million (3%) from $26.9 million in the first half of 2018 to $26.1 million in the first half of 2019 due to lower margins on loans sold due to increased competitive pressures primarily during the first quarter of 2019, partially offset by a 7% increase in the number of loan originations from 1,711 in the first half of 2018 to 1,835 in the first half of 2019 and an increase in the average loan amount from $304,000 in the six months ended June 30, 2018 to $311,000 in the six months ended June 30, 2019. We experienced a $2.1 million decrease in operating income in the first half of 2019 compared to the first half of 2018, which was primarily due to a $1.3 million increase in selling, general and administrative expense compared to 2018's first half in addition to the decrease in our revenue discussed above. The increase in selling, general and administrative expense was primarily attributable to a $0.9 million increase in compensation expense related to our increase in employee headcount and a $0.4 million increase in professional fees. At June 30, 2019, M/I Financial provided financing services in all of our markets. Approximately 79% of our homes delivered during the first half of 2019 were financed through M/I Financial, compared to 80% in 2018's first half. Capture rate is influenced by financing availability and can fluctuate from quarter to quarter. Corporate Selling, General and Administrative Expense. Corporate selling, general and administrative expense increased $2.6 million from $18.9 million for the six months ended June 30, 2018 to $21.5 million for the six months ended June 30, 2019. The increase was primarily due to a $1.5 million increase in compensation expense, a $0.4 million increase related to benefits that will be provided to existing employees as a result of the orderly wind-down of our Washington, D.C. operations, a $0.3 million increase in depreciation costs associated with new information systems, and a $0.5 million increase in other miscellaneous expenses. Acquisition and Integration Costs. During the six months ended June 30, 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. Income from Joint Venture Arrangements. Income from joint venture arrangements represent our portion of pre-tax earnings from our joint ownership and development agreements, joint ventures and other similar arrangements. During the six months ended June 30, 2019 and 2018, the Company earned less than $0.1 million and $0.2 million in equity in income from joint venture arrangements, respectively. Interest Expense - Net. Interest expense for the Company increased $1.2 million from $10.8 million in the six months ended June 30, 2018 to $12.0 million in the six months ended June 30, 2019. This increase was primarily the result of an increase in average borrowings under our Credit Facility (as defined below) during the first half of 2019 compared to prior year, offset, in part, by the maturity of our 3.0% Convertible Senior Subordinated Notes due 2018 (the “2018 Convertible Senior Subordinated Notes”) in March 2018, which were not outstanding at all during the first half of 2019 and had a lower interest rate than our borrowings under our Credit Facility. Our weighted average borrowings increased from $772.4 million in the first half of 2018 to $841.3 million in the first half of 2019, and our weighted average borrowing rate increased from 6.20% in 2018's first half to 6.26% in 2019's first half. Income Taxes. Our overall effective tax rate was 25.8% for the six months ended June 30, 2019 and 19.9% for the six months ended June 30, 2018. The increase in the effective rate for the six months ended June 30, 2019 was primarily attributable to a $3.0 million nonrecurring tax benefit taken during the quarter ended June 30, 2018 related to the retroactive reinstatement of energy efficient homes tax credits. 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 our Northern region is calculated as follows: LIQUIDITY AND CAPITAL RESOURCES Overview of Capital Resources and Liquidity. At June 30, 2019, we had $20.4 million of cash, cash equivalents and restricted cash, with $19.4 million of this amount comprised of unrestricted cash and cash equivalents, which represents a $1.5 million decrease in unrestricted cash and cash equivalents from December 31, 2018. Our principal uses of cash for the six months ended June 30, 2019 were investment in land and land development, construction of homes, mortgage loan originations, investment in joint ventures, operating expenses, short-term working capital, debt service requirements, including the repayment of amounts outstanding under our credit facilities and the repurchase of $5.2 million of our outstanding common shares under our 2018 Share Repurchase Program (as defined below) during the first quarter of 2019. In order to fund these uses of cash, we used proceeds from home deliveries, the sale of mortgage loans and the sale of mortgage servicing rights, as well as excess cash balances, borrowings under our credit facilities, and other sources of liquidity. We are actively acquiring and developing lots in our markets to replenish and grow our lot supply and active community count. We expect to continue to expand our business based on the anticipated level of demand for new homes in our markets. Accordingly, we expect that our cash outlays for land purchases, land development, home construction and operating expenses will exceed our cash generated by operations during some periods during the remainder of 2019, and we expect to continue to utilize our Credit Facility (as defined below) during the remainder of 2019. During the first half of 2019, we delivered 2,724 homes, started 3,119 homes, and spent $166.3 million on land purchases and $116.7 million on land development. Based upon our business activity levels, market conditions, and opportunities for land in our markets, we currently estimate that we will spend approximately $550 million to $600 million on land purchases and land development during 2019, including the $283.0 million spent during the first six months of 2019. We also continue to enter into land option agreements, taking into consideration current and projected market conditions, to secure land for the construction of homes in the future. Pursuant to such land option agreements, as of June 30, 2019, we had a total of 14,217 lots under contract, with an aggregate purchase price of approximately $574.1 million to be acquired during the remainder of 2019 through 2028. 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 deliveries and adjust our land spending accordingly. The planned increase in our land spending in 2019 compared to 2018 is driven primarily by the growth of our business. Operating Cash Flow Activities. During the six-month period ended June 30, 2019, we generated $10.6 million of cash from operating activities, compared to using $20.9 million of cash in operating activities during the first half of 2018. The cash generated from operating activities in the first half of 2019 was primarily a result of net income of $48.0 million, $44.7 million of proceeds from the sale of mortgage loans net of mortgage loan originations, and an increase in accounts payable and customer deposits totaling $28.6 million, offset partially by an $89.9 million increase in inventory and a decrease in accrued compensation of $18.5 million. The $20.9 million of cash used in operating activities in the first half of 2018 was primarily a result of a $137.7 million increase in inventory and a decrease in accrued compensation of $15.5 million, offset partially by net income of $46.0 million, along with $64.9 million of proceeds from the sale of mortgage loans net of mortgage loan originations, an increase in accounts payable of $13.7 million and an increase in customer deposits totaling $11.0 million. Investing Cash Flow Activities. During the first half of 2019, we used $16.7 million of cash in investing activities, compared to using $102.9 million of cash in investing activities during the first half of 2018. This decrease in cash used was primarily due to our acquisition of Pinnacle Homes, a privately held homebuilder in Detroit, Michigan, during the first quarter of 2018 for approximately $101.0 million (see Note 7 to our financial statements for more information), offset partially by proceeds from the sale of a portion of our mortgage servicing rights of $6.3 million in the first quarter of 2018 and an increase in our investment in joint venture arrangements during the first half of 2019 of $11.0 million. Financing Cash Flow Activities. During the six months ended June 30, 2019, we generated $5.0 million of cash from financing activities, compared to generating $39.9 million of cash during the first six months of 2018. The $34.9 million decrease in cash generated by financing activities was primarily due to a decrease in proceeds from borrowings (net of repayments) under our Credit Facility (as defined below) during the six months ended June 30, 2019 and the repurchase of $5.2 million of our common shares under our 2018 Share Repurchase Program (as defined below) during the first quarter of 2019, partially offset by the repayment during the first quarter of 2018 of that portion of our 3.0% Convertible Senior Subordinated Notes due 2018 (the “2018 Convertible Senior Subordinated Notes”) that were not converted into common shares by the holders thereof (approximately $65.9 million in aggregate principal amount), and a decrease in net repayments of borrowings under our two M/I Financial credit facilities. On August 14, 2018, the Company announced that its Board of Directors authorized a share repurchase program (the “2018 Repurchase Program”) pursuant to which the Company may purchase up to $50 million of its outstanding common shares (see Note 13 to our financial statements). During the first quarter of 2019, the Company repurchased 201,088 common shares with an aggregate purchase price of $5.2 million which was funded with cash on hand and borrowings under our Credit Facility. The Company did not make any additional repurchases during the quarter ended June 30, 2019. As of June 30, 2019, the Company is authorized to repurchase an additional $19.1 million of outstanding common shares under the 2018 Share Repurchase Program. At June 30, 2019 and December 31, 2018, our ratio of homebuilding debt to capital was 45% and 44%, respectively, calculated as the carrying value of our outstanding homebuilding debt divided by the sum of the carrying value of our outstanding homebuilding debt plus shareholders’ equity. This increase was due to higher debt levels compared to December 31, 2018, offset partially by an increase in shareholders’ equity at June 30, 2019. We believe that this ratio provides useful information for understanding our financial position and the leverage employed in our operations, and for comparing us with other homebuilders. We fund our operations with cash flows from operating activities, including proceeds from home deliveries, land sales and the sale of mortgage loans. We believe that these sources of cash, along with our balance of unrestricted cash and borrowings available under our credit facilities, will be sufficient to fund our currently anticipated working capital needs, investment in land and land development, construction of homes, operating expenses, planned capital spending, and debt service requirements for at least the next twelve months. In addition, we routinely monitor current operational and debt service requirements, financial market conditions, and credit relationships and we may choose to seek additional capital by issuing new debt and/or equity securities to strengthen our liquidity or our long-term capital structure. The financing needs of our homebuilding and financial services operations depend on anticipated sales volume in the current year as well as future years, inventory levels and related turnover, forecasted land and lot purchases, debt maturity dates, and other factors. If we seek such additional capital, there can be no assurance that we would be able to obtain such additional capital on terms acceptable to us, if at all, and such additional equity or debt financing could dilute the interests of our existing shareholders and/or increase our interest costs. The Company is a party to three primary credit agreements: (1) a $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”); (2) a $125 million secured mortgage warehousing agreement (which increases to $160 million during certain periods), dated June 24, 2016, as amended, with M/I Financial as borrower (the “MIF Mortgage Warehousing Agreement”); and (3) a $50 million mortgage repurchase agreement (which increases to $65 million during certain periods), dated October 30, 2017, as amended, with M/I Financial as borrower (the “MIF Mortgage Repurchase Facility”). The available amount under the Credit Facility is computed in accordance with the borrowing base calculation under the Credit Facility, which applies various advance rates for different categories of inventory and totaled $669.2 million of availability for additional senior debt at June 30, 2019. As a result, the full $500 million commitment amount of the facility was available, less any borrowings and letters of credit outstanding. There were $174.3 million of borrowings outstanding and $58.9 million of letters of credit outstanding at June 30, 2019, leaving $266.8 million available. The Credit Facility has an expiration date of July 18, 2021. The available amount is computed in accordance with the borrowing base calculations under the MIF Mortgage Warehousing Agreement and the MIF Mortgage Repurchase Facility, each of which may be increased by pledging additional mortgage collateral. The maximum aggregate commitment amount of M/I Financial’s warehousing agreements as of June 30, 2019 was $175 million. The MIF Mortgage Warehousing Agreement has an expiration date of June 19, 2020 and the MIF Mortgage Repurchase Facility has an expiration date of October 28, 2019. Notes Payable - Homebuilding. Homebuilding Credit Facility. The Credit Facility provides for an aggregate commitment amount of $500 million, including a $125 million sub-facility for letters of credit. The Credit Facility matures on July 18, 2021. Interest on amounts borrowed under the Credit Facility is payable at a rate which is adjusted daily and is equal to the sum of the one month LIBOR rate plus a margin of 250 basis points. The margin is subject to adjustment in subsequent quarterly periods based on the Company’s leverage ratio. Borrowings under the Credit Facility constitute senior, unsecured indebtedness and availability is subject to, among other things, a borrowing base calculated using various advance rates for different categories of inventory. The Credit Facility contains various representations, warranties and covenants which require, among other things, that the Company maintain (1) a minimum level of Consolidated Tangible Net Worth of $551.2 million (subject to increase over time based on earnings and proceeds from equity offerings), (2) a leverage ratio not in excess of 60%, and (3) either a minimum Interest Coverage Ratio of 1.5 to 1.0 or a minimum amount of available liquidity. In addition, the Credit Facility contains covenants that limit the Company’s number of unsold housing units and model homes, as well as the amount of Investments in Unrestricted Subsidiaries and Joint Ventures. The Company’s obligations under the Credit Facility are guaranteed by all of the Company’s subsidiaries, with the exception of subsidiaries that are primarily engaged in the business of mortgage financing, title insurance or similar financial businesses relating to the homebuilding and home sales business, certain subsidiaries that are not 100%-owned by the Company or another subsidiary, and other subsidiaries designated by the Company as Unrestricted Subsidiaries (as defined in Note 12 to our financial statements), subject to limitations on the aggregate amount invested in such Unrestricted Subsidiaries. The guarantors for the Credit Facility are the same subsidiaries that guarantee our $250.0 million aggregate principal amount of 5.625% Senior Notes due 2025 (the “2025 Senior Notes”) and our $300.0 million aggregate principal amount of 6.75% Senior Notes due 2021 (the “2021 Senior Notes”). As of June 30, 2019, the Company was in compliance with all covenants of the Credit Facility, including financial covenants. The following table summarizes the most significant restrictive covenant thresholds under the Credit Facility and our compliance with such covenants as of June 30, 2019: Notes Payable - Financial Services. MIF Mortgage Warehousing Agreement. The MIF Mortgage Warehousing Agreement is used to finance eligible residential mortgage loans originated by M/I Financial. The MIF Mortgage Warehousing Agreement provides a maximum borrowing availability of $125 million. In June 2019, the Company entered into an amendment to the MIF Mortgage Warehousing Agreement, which, among other things, extends the expiration date to June 19, 2020, and allows the maximum borrowing availability to be increased to $160 million from September 25, 2019 to October 15, 2019 and also from November 15, 2019 to February 4, 2020 (periods of higher volume of mortgage originations). Interest on amounts borrowed under the MIF Mortgage Warehousing Agreement is payable at a per annum rate equal to the floating LIBOR rate plus a spread of 200 basis points. The MIF Mortgage Warehousing Agreement is secured by certain mortgage loans originated by M/I Financial that are being “warehoused” prior to their sale to investors. The MIF Mortgage Warehousing Agreement provides for limits with respect to certain loan types that can secure outstanding borrowings. There are currently no guarantors of the MIF Mortgage Warehousing Agreement. As of June 30, 2019, there was $78.2 million outstanding under the MIF Mortgage Warehousing Agreement and M/I Financial was in compliance with all covenants thereunder. The financial covenants, as more fully described and defined in the MIF Mortgage Warehousing Agreement, are summarized in the following table, which also sets forth M/I Financial’s compliance with such covenants as of June 30, 2019: Financial Covenant Covenant Requirement MIF Mortgage Repurchase Facility. The MIF Mortgage Repurchase Facility is used to finance eligible residential mortgage loans originated by M/I Financial and is structured as a mortgage repurchase facility. The MIF Mortgage Repurchase Facility provides for a maximum borrowing availability of $50 million, which increased to $65 million from November 15, 2018 through February 1, 2019 (a period of expected increases in the volume of mortgage originations). The MIF Mortgage Repurchase Facility expires on October 28, 2019. As is typical for similar credit facilities in the mortgage origination industry, at closing, the expiration of the MIF Mortgage Repurchase Facility was set at approximately one year and is under consideration for extension annually by the lender. We expect to extend the MIF Mortgage Repurchase Facility on or prior to the current expiration date of October 28, 2019, but we cannot provide any assurance that we will be able to obtain such an extension. M/I Financial pays interest on each advance under the MIF Mortgage Repurchase Facility at a per annum rate equal to the floating LIBOR rate plus 200 or 225 basis points depending on the loan type. The covenants in the MIF Mortgage Repurchase Facility are substantially similar to the covenants in the MIF Mortgage Warehousing Agreement. The MIF Mortgage Repurchase Facility provides for limits with respect to certain loan types that can secure outstanding borrowings, which are substantially similar to the restrictions in the MIF Mortgage Warehousing Agreement. There are no guarantors of the MIF Mortgage Repurchase Facility. As of June 30, 2019, there was $25.8 million outstanding under the MIF Mortgage Repurchase Facility. M/I Financial was in compliance with all financial covenants under the MIF Mortgage Repurchase Facility as of June 30, 2019. Senior Notes. 5.625% Senior Notes. In August 2017, the Company issued $250 million aggregate principal amount of 5.625% Senior Notes due 2025. The 2025 Senior Notes contain certain covenants, as more fully described and defined in the indenture governing the 2025 Senior Notes, which limit the ability of the Company and the restricted subsidiaries to, among other things: incur additional indebtedness; make certain payments, including dividends, or repurchase any shares, in an aggregate amount exceeding our “restricted payments basket”; make certain investments; and create or incur certain liens, consolidate or merge with or into other companies, or liquidate or sell or transfer all or substantially all of our assets. These covenants are subject to a number of exceptions and qualifications as described in the indenture governing the 2025 Senior Notes. As of June 30, 2019, the Company was in compliance with all terms, conditions, and covenants under the indenture. See Note 8 to our financial statements for more information regarding the 2025 Senior Notes. 6.75% Senior Notes. In December 2015, the Company issued $300 million aggregate principal amount of 6.75% Senior Notes due 2021. The 2021 Senior Notes contain certain covenants, as more fully described and defined in the indenture governing the 2021 Senior Notes, which limit the ability of the Company and the restricted subsidiaries to, among other things: incur additional indebtedness; make certain payments, including dividends, or repurchase any shares, in an aggregate amount exceeding our “restricted payments basket”; make certain investments; and create or incur certain liens, consolidate or merge with or into other companies, or liquidate or sell or transfer all or substantially all of our assets. These covenants are subject to a number of exceptions and qualifications as described in the indenture governing the 2021 Senior Notes. As of June 30, 2019, the Company was in compliance with all terms, conditions, and covenants under the indenture. Weighted Average Borrowings. For the three months ended June 30, 2019 and 2018, our weighted average borrowings outstanding were $855.0 million and $789.8 million, respectively, with a weighted average interest rate of 6.22% and 6.18%, respectively. The increase in our weighted average borrowings related to increased borrowings under our Credit Facility during the second quarter of 2019 compared to the same period in 2018. At June 30, 2019, we had $174.3 million of borrowings outstanding under the Credit Facility, an increase from $117.4 million outstanding at December 31, 2018. During the first half of 2019, the Company used the Credit Facility for investment in land and land development, construction of homes, operating expenses, working capital requirements and share repurchases under our 2018 Share Repurchase Program. During the six months ended June 30, 2019, the average daily amount outstanding under the Credit Facility was $221.3 million and the maximum amount outstanding under the Credit Facility was $272.7 million. Based on our currently anticipated spending on home construction, land acquisition and development in 2019, offset by expected cash receipts from home deliveries, we expect to continue to borrow under the Credit Facility during 2019, with an estimated peak amount outstanding not expected to exceed $300 million. The actual amount borrowed during 2019 (and the estimated peak amount outstanding) and related timing are subject to numerous factors, including the timing and amount of land and house construction expenditures, payroll and other general and administrative expenses, cash receipts from home deliveries, other cash receipts and payments, any capital markets transactions or other additional financings by the Company, any repayments or redemptions of outstanding debt, any additional share repurchases under the 2018 Share Repurchase Program and any other extraordinary events or transactions. The Company may experience significant variation in cash and Credit Facility balances from week to week due to the timing of such receipts and payments. There were $58.9 million of letters of credit issued and outstanding under the Credit Facility at June 30, 2019. During the six months ended June 30, 2019, the average daily amount of letters of credit outstanding under the Credit Facility was $58.5 million and the maximum amount of letters of credit outstanding under the Credit Facility was $61.8 million. At June 30, 2019, M/I Financial had $78.2 million outstanding under the MIF Mortgage Warehousing Agreement. During the six months ended June 30, 2019, the average daily amount outstanding under the MIF Mortgage Warehousing Agreement was $42.4 million and the maximum amount outstanding was $113.0 million, which occurred during January, while the temporary increase provision was in effect and the maximum borrowing availability was $160.0 million. At June 30, 2019, M/I Financial had $25.8 million outstanding under the MIF Mortgage Repurchase Facility. During the six months ended June 30, 2019, the average daily amount outstanding under the MIF Mortgage Repurchase Facility was $24.8 million and the maximum amount outstanding was $40.2 million, which occurred during January, while the temporary increase provision was in effect and the maximum borrowing availability was $65.0 million. Universal Shelf Registration. In June 2019, the Company filed a $400 million universal shelf registration statement with the SEC, which registration statement became effective upon filing and will expire in June 2022. Pursuant to the registration statement, the Company may, from time to time, offer debt securities, common shares, preferred shares, depositary shares, warrants to purchase debt securities, common shares, preferred shares, depositary shares or units of two or more of those securities, rights to purchase debt securities, common shares, preferred shares or depositary shares, stock purchase contracts and units. The timing and amount of offerings, if any, will depend on market and general business conditions. CONTRACTUAL OBLIGATIONS There have been no material changes to our contractual obligations appearing in the Contractual Obligations section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2018. OFF-BALANCE SHEET ARRANGEMENTS Our off-balance sheet arrangements relating to our homebuilding operations include joint venture arrangements, land option agreements, guarantees and indemnifications associated with acquiring and developing land, and the issuance of letters of credit and completion bonds. Our use of these arrangements is for the purpose of securing the most desirable lots on which to build homes for our homebuyers in a manner that we believe reduces the overall risk to the Company. Additionally, in the ordinary course of its business, M/I Financial issues guarantees and indemnities relating to the sale of loans to third parties. Land Option Agreements. In the ordinary course of business, the Company enters into land option or purchase agreements for which we generally pay non-refundable deposits. Pursuant to these land option agreements, the Company provides a deposit to the seller as consideration for the right to purchase land at different times in the future, usually at predetermined prices. In accordance with ASC 810, we analyze our land option or purchase agreements to determine whether the corresponding land sellers are VIEs and, if so, whether we are the primary beneficiary. 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 in our Unaudited Condensed Consolidated Balance Sheets. At both June 30, 2019 and December 31, 2018, 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. At June 30, 2019, “Consolidated Inventory Not Owned” was $13.1 million. At June 30, 2019, the corresponding liability of $13.1 million has been classified as Obligation for Consolidated Inventory Not Owned on our Unaudited Condensed Consolidated Balance Sheets. Other than the Consolidated Inventory Not Owned balance, the Company currently believes that its maximum exposure as of June 30, 2019 related to our land option agreements is equal to the amount of the Company’s outstanding deposits and prepaid acquisition costs, which totaled $52.0 million, including cash deposits of $32.4 million, prepaid acquisition costs of $6.0 million, letters of credit of $9.6 million and $4.0 million of other non-cash deposits. Letters of Credit and Completion Bonds. The Company provides standby letters of credit and completion bonds for development work in progress, deposits on land and lot purchase agreements and miscellaneous deposits. As of June 30, 2019, the Company had outstanding $233.5 million of completion bonds and standby letters of credit, some of which were issued to various local governmental entities, that expire at various times through September 2026. Included in this total are: (1) $167.7 million of performance and maintenance bonds and $48.8 million of performance letters of credit that serve as completion bonds for land development work in progress; (2) $10.0 million of financial letters of credit; and (3) $7.0 million of financial bonds. 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 houses 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. Guarantees and Indemnities. In the ordinary course of business, M/I Financial enters into agreements that guarantee purchasers of its mortgage loans that M/I Financial will repurchase a loan if certain conditions occur. The risks associated with these guarantees are offset by the value of the underlying assets, and the Company accrues its best estimate of the probable loss on these loans. Additionally, the Company has provided certain other guarantees and indemnities in connection with the acquisition and development of land by our homebuilding operations. See Note 5 to our Condensed Consolidated Financial Statements for additional details relating to our guarantees and indemnities. INTEREST RATES AND INFLATION Our business is significantly affected by general economic conditions within the United States and, particularly, by the impact of interest rates and inflation. Inflation can have a long-term impact on us because increasing costs of land, materials and labor can result in a need to increase the sales prices of homes. In addition, inflation is often accompanied by higher interest rates, which can have a negative impact on housing demand and the costs of financing land development activities and housing construction. Higher interest rates also may decrease our potential market by making it more difficult for homebuyers to qualify for mortgages or to obtain mortgages at interest rates that are acceptable to them. The impact of increased rates can be offset, in part, by offering variable rate loans with lower interest rates. In conjunction with our mortgage financing services, hedging methods are used to reduce our exposure to interest rate fluctuations between the commitment date of the loan and the time the loan closes. Rising interest rates, as well as increased materials and labor costs, may reduce gross margins. An increase in material and labor costs is particularly a problem during a period of declining home prices. Conversely, deflation can impact the value of real estate and make it difficult for us to recover our land costs. Therefore, either inflation or deflation could adversely impact our future results of operations. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our primary market risk results from fluctuations in interest rates. We are exposed to interest rate risk through borrowings under our revolving credit facilities, consisting of the Credit Facility, the MIF Mortgage Warehousing Agreement, and the MIF Mortgage Repurchase Facility which permitted borrowings of up to $675 million as of June 30, 2019, subject to availability constraints. Additionally, M/I Financial is exposed to interest rate risk associated with its mortgage loan origination services. Interest Rate Lock Commitments: Interest rate lock commitments (“IRLCs”) are extended to certain homebuying customers who have applied for a mortgage loan and meet certain defined credit and underwriting criteria. Typically, the IRLCs will have a duration of less than six months; however, in certain markets, the duration could extend to nine months. Some IRLCs are committed to a specific third party investor through the use of whole loan delivery commitments matching the exact terms of the IRLC loan. Uncommitted IRLCs are considered derivative instruments and are fair value adjusted, with the resulting gain or loss recorded in current earnings. Forward Sales of Mortgage-Backed Securities: Forward sales of mortgage-backed securities (“FMBSs”) are used to protect uncommitted IRLC loans against the risk of changes in interest rates between the lock date and the funding date. FMBSs related to uncommitted IRLCs are classified and accounted for as non-designated derivative instruments and are recorded at fair value, with gains and losses recorded in current earnings. Mortgage Loans Held for Sale: Mortgage loans held for sale consist primarily of single-family residential loans collateralized by the underlying property. During the period between when a loan is closed and when it is sold to an investor, the interest rate risk is covered through the use of a whole loan contract or by FMBSs. The FMBSs are classified and accounted for as non-designated derivative instruments, with gains and losses recorded in current earnings. 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. See Note 6 to the Company’s 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 condition, 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.