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Edited Transcript of MHO earnings conference call or presentation 5-Feb-20 9:00pm GMT

Q4 2019 M/I Homes Inc Earnings Call

Columbus Feb 11, 2020 (Thomson StreetEvents) -- Edited Transcript of M/I Homes Inc earnings conference call or presentation Wednesday, February 5, 2020 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ann Marie W. Hunker

M/I Homes, Inc. - VP & Corporate Controller

* Derek J. Klutch

M/I Homes, Inc. - President & CEO of M/I Financial

* Kevin C. Hake

M/I Homes, Inc. - Senior VP of Finance & Business Development and Treasurer

* Phillip G. Creek

M/I Homes, Inc. - Executive VP, CFO & Director

* Robert H. Schottenstein

M/I Homes, Inc. - Chairman, President & CEO

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Conference Call Participants

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* Alex Barrón

Housing Research Center, LLC - Founder and Senior Research Analyst

* Arthur Michael Winston

Pilot Advisors, L.P. - CEO, President, and Chief Operations Officer

* Jay McCanless

Wedbush Securities Inc., Research Division - SVP of Equity Research

* Thomas Patrick Maguire

Zelman & Associates LLC - Senior Research Associate

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by and welcome to the M/I Homes Fourth Quarter and Year-End Earnings Conference Call. (Operator Instructions)

Thank you. Mr. Phil Creek, please go ahead.

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Phillip G. Creek, M/I Homes, Inc. - Executive VP, CFO & Director [2]

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Thank you. Appreciate you tuning in to the call today. Joining me in Columbus, Ohio is Bob Schottenstein, our CEO and President;

Tom Mason, EVP; Derek Klutch, our President of our Mortgage Company; Ann Marie Hunker, VP, Corporate Controller; and Kevin Hake, Senior VP.

First, to address Regulation Fair Disclosure, we encourage you to ask any questions regarding issues that you consider material during this call because we are prohibited from discussing significant nonpublic items with you directly.

And as to forward-looking statements, I want to remind everyone that the cautionary language about forward-looking statements contained in today's press release also applies to any comments made during this call. Also, be advised that the company undertakes no obligation to update any forward-looking statements made during this call.

Also during this call, we disclose certain non-GAAP financial measures. A presentation of the most directly comparable financial measure calculated in accordance with GAAP and a reconciliation of the differences between the non-GAAP financial measure and the GAAP measure was included in our earnings release issued earlier today that is available on our website.

Now I'll turn the call over to Bob.

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Robert H. Schottenstein, M/I Homes, Inc. - Chairman, President & CEO [3]

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Thanks, Phil, and good afternoon, and thank you all for joining our call today. 2019 was a very strong year for M/I Homes, highlighted by record revenue, record new contracts, record homes delivered and record pretax income. For the year, we sold 6,773 homes, an increase of 16% over 2018. And during the fourth quarter, we sold 1,677 homes, a fourth quarter record and 43% better than a year ago.

Our community count during 2019 increased on average about 6%. So with our sales up 16%, we experienced nearly 10% better sales pace per community per month. And we are very pleased with the sales results of our most affordably priced Smart Series product. Our Smart Series continues to represent a greater percentage of our overall sales mix as well as a greater percentage of our overall community mix. At the end of 2019, our Smart Series houses were being offered in just over 25% of our communities. That compares to roughly 10% a year ago and comprised an even slightly higher than 25% of total sales. We continue to achieve both good pace and good margins in our Smart Series communities and expect that segment of our business to continue to grow in a very good way.

Our revenues for 2019 increased 9% to $2.5 billion and homes delivered increased also 9% to 6,296 homes. We ended 2019 with the highest year-end sales backlog in company history with an average sales value of $1.1 billion. That is 18% better than a year ago.

And we continue to improve our profitability. Pretax income aided by improved operating leverage increased 18% for the year to $166 million and net income grew by 19% to $128 million. More specifically, in terms of our operating leverage and improved profitability, we achieved a 20 basis point improvement in our SG&A expense ratio compared to 2018. And our 2019 full year gross margins also improved by 20 basis points compared to 2018.

M/I Financial, our financial services segment, also recorded another strong year with a record number of loans originated as well as record revenue.

As a company, we have achieved steady and consistent growth over the past 10 years with new contracts growing at an impressive 11% compounded annual growth rate since 2010. Revenues during that period have grown by 17%. And EBITDA over that same 10-year period has grown at a very strong 28% compounded annual rate. And with our improved returns, our return on equity in 2019 reached 14%.

From a balance sheet standpoint, we are in the best shape we've ever been in. We improved our homebuilding debt-to-capital rate to 38%, increased our net worth to just over $1 billion and successfully extended our debt maturity and improved our borrowing rate by redeeming $300 million of 6.75% senior notes that were due in 2021, replacing it with a $400 million offering of 8-year notes with a rate of 4.95%.

Now I'd like to provide a little bit more detail about our various markets. First, beginning with the Southern region, which is comprised of our 3 Florida, 4 Texas and 2 North Carolina markets. In the Southern region, we had 1,178 deliveries during the fourth quarter and 3,814 deliveries for the year. That's 10% better than last year and 61% of the total of the company for the year. New contracts in the Southern region increased by 35% during the fourth quarter and 15% for the full year.

The dollar value of our sales backlog in the Southern region at the end of 2019 was up 16% and our controlled lot position in the Southern region increased 22% year-over-year. We had 129 active communities in the Southern region at year-end. That's 8% better than a year ago.

We experienced solid increases in both closings and sales in all 4 of our Texas markets in 2019 as well as in Charlotte and are making significant progress in growing our relatively new operation in Sarasota, Florida, where we now have 10 communities open and selling. All of this will lead to substantial increase -- all of this led, I should say, to substantial increases in both sales and closings for the fourth quarter and full year.

Orlando and Tampa also grew their unit volumes in 2019 and as we stated in previous calls, continued to be 2 of our strongest markets and operations.

Finally, let me note that during 2019, as reported earlier, we decided not to invest further in the D.C. market. We have substantially sold out and closed that operation as of the end of 2019. We have merely a handful of homes remaining to close in 2020.

Next, moving to the Northern region, which is comprised of our 6 Midwest markets. In the Northern region, we delivered 743 homes in the fourth quarter and 2,482 for the year. That's a 7% increase from last year and 39% of company-wide total for the year.

New contracts in the Northern region were up 58% during the fourth quarter and 17% for the year. Our sales backlog in the Northern region was up 21% from the start of the year in dollar value and our controlled lot position increased by 8% year-over-year.

We ended the year with 96 active communities in the Northern region. That's an increase of 7% over a year ago. Overall, our markets in the Northern region continued to perform at a high level.

Columbus is one of our strongest markets, Cincinnati is performing very well and we achieved significant growth and very solid financial performance in Minneapolis. We also experienced significant increases in closing and sales in Indianapolis and are on track to achieve higher volumes this year in our relatively new Detroit operation. And we are pleased with the progress we expect to make in Chicago this year.

Before turning the call over to Phil, let me conclude with just a few points. First, 2019 was a banner year for our company. We ended 2019 with a record backlog. Our balance sheet is as strong as it's ever been. We're excited about our position and our communities in all 15 of our markets. We continue to experience strong performance out of our growing Smart Series. And housing conditions are good. And we are optimistic about the spring selling season. In sum, M/I Homes is very well positioned for a very strong 2020.

With that, I'll turn it over to Phil.

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Phillip G. Creek, M/I Homes, Inc. - Executive VP, CFO & Director [4]

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Thanks, Bob. New contracts for 2019 increased 16% to an all-time record of 6,773. And for the fourth quarter, our new contracts were up 38% in October, up 38% in November and up 56% in December for a total 43% improvement compared to last year's fourth quarter. And our traffic for the quarter was up 19%.

As to our buyer profile, about 49% of our fourth quarter sales were to first-time buyers. This compares to 46% in 2019's third quarter. And 44% of our fourth quarter sales were inventory homes compared to 47% in the third quarter. Our community count was 225 at the end of 2019, up 8% versus 2018's year-end. The breakdown by region is 96 in the Northern and 129 in the Southern.

During the quarter, we opened 22 new communities while closing 18. And for the year, we opened 80 new communities and closed 64. And for the year, our average community count was up 6%. For 2020, our current estimate is that our average community count will be up about 5% from 2019.

We delivered 1,921 homes in the fourth quarter, delivering 66% of our backlog compared to 64% a year ago. And our more efficient Smart Series is aiding our backlog conversion rate.

Revenue increased 3% in the fourth quarter of 2019, reaching a fourth quarter record $742 million. This was primarily a result of the record increase in the number of homes delivered. And our average closing price for the fourth quarter was $377,000, a 2% decrease when compared to last year's fourth quarter average closing price of $383,000.

Our backlog average sale price is $396,000, down 3% from a year ago. And our backlog average sale price of our Smart Series is $302,000. We recorded $5 million of impairment charges in 2019's fourth quarter compared to $5.8 million in 2018's fourth quarter. The 2019 charge was primarily for higher priced lots in Chicago and Charlotte.

Our adjusted gross margin for the fourth quarter was 19.9%. This was 100 basis points higher than last year's comparable adjusted gross margin. And for the full year of 2019, our adjusted gross margin was 19.8% versus 2018's 19.9%. And our construction costs had minimal change during the fourth quarter.

Our 2019 full year pretax income was impacted by $600,000 of acquisition-related charges from our Detroit acquisition in March of '18 compared with $6.8 million in 2018.

Our fourth quarter SG&A expenses were 11.7% of revenue, up from 11.1% in last year's fourth quarter. This increase was primarily due to increased compensation costs associated with our strong earnings, costs from opening a significant number of new communities, we opened 22 new communities in 2019's fourth quarter versus 13 new communities in 2018's fourth quarter, and increased costs related to upgrades in our information technology systems.

For the year, our SG&A expense ratio was 12.1%, a 20 basis point improvement compared to 2018. And improving our operating efficiencies continues to be a major area of focus.

Interest expense decreased $500,000 for the quarter compared to the same period last year and increased $900,000 for 2019. The increase for the year was due to higher weighted average outstanding borrowings in 2019.

Interest incurred for the quarter was $12.5 million compared to $13.1 million a year ago. We have $21.6 million in capitalized interest on our balance sheet. This is about 1% of our total assets.

Our effective tax rate was 19% in 2019's fourth quarter compared to 27% in last year's fourth quarter. And our annual effective rate in 2019 was 23% compared to 24% in 2018. Our fourth quarter and annual tax rate benefited from the extension of the energy tax credit in December of '19. And we expect 2020's effective tax rate to be around 24%.

Our earnings per diluted share for the quarter increased 19% to $1.57 per share and increased 15% for the year to $4.63, excluding the impact of acquisition-related costs and impairment charges.

And during the first quarter of 2019, we repurchased 5 million of our outstanding shares. We did not repurchase any shares during the remainder of 2019.

Now Derek Klutch will address our mortgage company results.

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Derek J. Klutch, M/I Homes, Inc. - President & CEO of M/I Financial [5]

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Thanks, Phil. Our mortgage and title operations achieved a number of fourth quarter records in 2019, including record pretax income of $6.4 million, up $1.1 million over 2018. Record revenue of $15.8 million, which was up 20% over last year and record closings. For the year, pretax income was $23.7 million and revenue was $55.3 million, another all-time record.

We saw some improvement in pricing margins, particularly in the second half of the year. Loan-to-value on our first mortgages for the fourth quarter was 82% in 2019, a modest increase from 2018's fourth quarter of 81%. 76% of the loans closed in the quarter were conventional and 24% were FHA or VA. This compared to 79% and 21%, respectively, for 2018's same period.

Our average mortgage amount increased to $303,000 in 2019's fourth quarter compared to $300,000 in 2018. The number of loans originated increased 13% from 1,242 to 1,398, and the volume of loans sold increased by 23%.

For the quarter, the average borrower credit score on mortgages originated by M/I Financial was 744, a slight decline from 746 last quarter.

Our mortgage operation captured about 84% of our business in the fourth quarter, a significant increase from 80% in 2018's fourth quarter. At December 31, we had a total of $137 million outstanding under our 2 M/I Financial mortgage warehouse credit facilities, which expire in June and October of this year. Both facilities are typical 364-day mortgage warehouse bonds that we extend annually. Due to our typical high volume of fourth quarter closings, we include a seasonal increase in our warehousing facilities, which provide temporary availability of $225 million through January of 2020, after which time total availability returns to $190 million.

Now I'll turn the call back over to Phil.

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Phillip G. Creek, M/I Homes, Inc. - Executive VP, CFO & Director [6]

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Thanks, Derek. We continue to manage our balance sheet carefully, focusing on investing in new communities while also managing our capital structure.

Total homebuilding inventory at 12/31/19 was $1.8 billion, an increase of $95 million above 12/31/18 levels primarily due to higher community count and more finished lots.

Our unsold land investment at 12/31/19 is $835 million compared to $782 million a year ago. At December 31, we had $344 million of raw land and land under development, and $491 million of finished unsold lots. We own 6,220 unsold finished lots with an average cost of $79,000 per lot, and this average lot cost is 20% of our $396,000 backlog average sale price. Our goal is to maintain about a 1-year supply of owned finished lots.

And the market breakdown of our $835 million of unsold land is $385 million in the North and $450 million in the South. Lots owned and controlled as of 12/31/19 totaled 33,300 lots, 44% of which were owned and 56% under contract.

We own 14,700 lots, of which 47% are in the North and 53% in the South. Based on 2019 sales, we currently own a 2.2-year supply of lots and control a 4.9-year supply. A year ago, we owned 14,000 lots and controlled a total of 28,700 lots.

During 2019's fourth quarter, we spent $73 million on land purchases and $83 million on land development for a total of $156 million, and about 31% of the purchase amount was raw land. For 2019, we spent $600 million on land purchases and land development, and about 44% of the purchase amount was raw land. Our current estimate for 2020 land purchase and development spending is $650 million to $700 million.

At the end of the quarter, we had 668 completed inventory homes and 1,459 total inventory homes. And of the total inventory, 622 were in the Northern region and 837 are in the Southern region. And at December 31, '18, we had 591 completed inventory homes and 1,443 total inventory homes. For comparison, we had 3.0 finished specs per community at 12/31/19 versus 2.8 at 12/31/18.

Our financial condition continues to be strong with a record $1 billion in equity at year-end, equal to a book value of $35 per share and our homebuilding debt-to-cap ratio declined to 38% at year-end from 44% a year ago.

In 2019, we generated $240 million of EBITDA, up 14% over last year and generated $66 million of cash from operating activities. Interest incurred was $49 million in 2019 compared to $47 million last year. And in January of 2020, we issued $400 million of 4.95% 8-year senior notes and redeemed our $300 million 6.75% senior notes due 2021 at par. And at 12/31/19, there was $66 million outstanding under our $500 million unsecured revolving credit facility.

This completes our presentation. We'll now open the call for any questions or comments.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Thomas Maguire from Zelman & Associates.

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Thomas Patrick Maguire, Zelman & Associates LLC - Senior Research Associate [2]

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Really strong results. Congrats on the quarter and a strong finish to the year. I guess, just first on the volume side of the equation. As we think about the go-forward sales per community, as you talked about, is really strong on an absolute basis. And I think the fourth quarter is probably the highest level we've seen in our model. But is there a room for absorptions to go higher with the tailwind from affordable communities going forward? Or do you think we're at a little bit of a wall from an absolute pace perspective right now? And then can you just talk about the difference in absorptions for the entry-level product versus traditional communities, and how wide that spread is?

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Robert H. Schottenstein, M/I Homes, Inc. - Chairman, President & CEO [3]

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I hope there's room for absorptions to go up. But I will say even if they stay right where they are, I think we can perform at a high level and improve profitability. Clearly, the pace is a little bit better in our Smart Series communities.

I think -- I don't know that I have an exact number to give you. In fact, I guess, I should say, I know that I don't have an exact number to give you. But the other side of it is that an average could be a little bit misleading because some of them -- we have some smart communities that are running 4, 5, 6, 7 sales a month. And then we might have some that are running 2 to 2.5. So they're not all home runs, and I know you probably understand that. But on average, we clearly have better pace. And we -- and I think that our Smart Series will continue to represent a greater percentage of overall business. Last year, at this time, we thought it might be around 20%, 25%. It's actually higher than that now. I think it could still creep up to north of 30%, 35% over the next 12 to 18 months. And if conditions as they are now remain pretty much the same, that should improve our pace.

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Phillip G. Creek, M/I Homes, Inc. - Executive VP, CFO & Director [4]

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And we're also excited about continuing our community count growth. I mean, it's challenging for all of us with sales as strong as they've been. But as we've said, we were able to open 80 communities last year. We did close out 64 with average communities up about 6%. But again, we are looking to continue to increase that community count on average by 5% this year. So we're very excited about that.

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Thomas Patrick Maguire, Zelman & Associates LLC - Senior Research Associate [5]

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Yes. Absolutely. And it looks like you guys sell the land, the lot pipeline tick up, too. So that should support that moving forward. And then just to go back really quick, if we think about pricing power, Bob, you've talked about the business from a profitability perspective being in a tight range. Is today's environment any different when you think about the consumer? Is there an ability to raise price? How do you think about that? And marrying that with the comment of costs being relatively flat right now, how would you frame kind of the price/cost dynamic, understanding there's both consumer side and the side that you have?

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Robert H. Schottenstein, M/I Homes, Inc. - Chairman, President & CEO [6]

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Well, just to be consistent, we said we think it's a 20% to 21% business today. And I think we're more optimistic about margins being better than not. I think we have a little bit of pricing power, not a lot. And it's very -- it's market-dependent and location-dependent. But I think our margins -- I know there's sometimes mix in the quarter. And fourth quarter, we tend to see a lot more specs closing. And on average, spec margins tend to be a little lower than to-be-builts. But I think that our gross margins have been trending up. And I don't think they're going to get any worse. I think that -- we give no guidance on this, but I would expect them to be at least where they are now, if not better for the year.

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Operator [7]

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And your next question comes from the line of Alex Barrón from Housing Research Center.

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Alex Barrón, Housing Research Center, LLC - Founder and Senior Research Analyst [8]

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I guess on the margin front, I think, last quarter, you guys had indicated you thought the margins might be a little better this quarter and they were a little bit lower. So was it mainly what you just said that it was more specs that closed?

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Phillip G. Creek, M/I Homes, Inc. - Executive VP, CFO & Director [9]

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Yes. Alex, it was mix, for sure. We did close a few more specs, like Bob said. I mean, if you look at our margins in 2019, they were kind of flat in the first half. The second quarter went up over 20%. The fourth quarter was a little below. So there wasn't a major, major swing, but, no, nothing really unusual.

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Alex Barrón, Housing Research Center, LLC - Founder and Senior Research Analyst [10]

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Okay. And then, I was wondering if you guys could comment on -- you -- I think I heard you say December was up 50-something percent. How was January? And what are your overall expectations about how sustainable current sales paces are for the rest of the year?

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Phillip G. Creek, M/I Homes, Inc. - Executive VP, CFO & Director [11]

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Yes. As far as going through the numbers, again, October was up 38%, November was up 38% and December was up 56%. We don't really make any specific comments about January.

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Robert H. Schottenstein, M/I Homes, Inc. - Chairman, President & CEO [12]

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Yes. And I'll add to that other than to say that we're optimistic about the selling season. It's underway. I think it even -- in my view, it started earlier this year than normal. There used to be some sort of belief that it would start after the Super Bowl. Housing didn't pay any attention to Super Bowl this year and started earlier. And I think it's -- we're in a favorable rate environment. And I think consumer confidence is certainly in a good spot. And as long as rates stay at roughly 4 or below 4 level, which I think it's reasonable to assume that they will for some time, I think housing has got a little bit of room to run. And I think we do, too.

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Phillip G. Creek, M/I Homes, Inc. - Executive VP, CFO & Director [13]

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I mean, we had at the end of the year 8% more stores flowing into the year. We also opened, as we said, 80 communities last year with 22 of them being in the fourth quarter. So we're excited about hitting the ground running. So yes, we are excited about the spring selling season.

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Alex Barrón, Housing Research Center, LLC - Founder and Senior Research Analyst [14]

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And if I could ask one more. Is there any change in the outlook for markets? Are there any markets that you are thinking of entering? And I think you guys had indicated you were going to change your D.C. exposure. Any changes there?

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Robert H. Schottenstein, M/I Homes, Inc. - Chairman, President & CEO [15]

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We've closed our D.C. operation. We announced that about a year ago. We executed it about as flawlessly as I think we could have. It's never easy to close up a market for all the obvious reasons, but it was somewhat seamless and painless, at least from a financial standpoint. And basically, we have nothing but just a small handful of lots left, either sell or close in D.C.

As far as further expansion going forward, it's something we always look at. We have nothing to report, but it is something we continue to look at and watch and monitor.

We believe we have the capital, both human and financial, to further expand our geographic footprint, if there was this transaction that we thought was sensible and in the best interest of the company.

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Phillip G. Creek, M/I Homes, Inc. - Executive VP, CFO & Director [16]

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But also having said that, as we said in the past, Alex, we think we're really positioned well to continue to have strong growth for the next few years. In our existing markets, job 1 has been trying to grow our existing market. We've entered a number of new markets the last few years. So if we can find something that makes sense, we want to be all about that. But we sure do not have any type of need to do that.

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Operator [17]

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And your next question comes from the line of Art Winston from Pilot Advisors.

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Arthur Michael Winston, Pilot Advisors, L.P. - CEO, President, and Chief Operations Officer [18]

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Could you explain in a little more detail how you managed to increase the inventory and at the same time, it seems to me, decrease the debt, if I'm looking at the balance sheet appropriately? Maybe I'm not doing it right, but that's what it seems like to me.

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Phillip G. Creek, M/I Homes, Inc. - Executive VP, CFO & Director [19]

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Well, as far as the investment side of it, as we talked about, we did spend $600 million on land, feel very good about our owned and controlled land position. We also had record closings in the fourth quarter and the year. So with the record closings and the higher income level, we talked about for the year we generated about $70 million of cash from operations. So that's what led to the strengthening of the balance sheet.

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Kevin C. Hake, M/I Homes, Inc. - Senior VP of Finance & Business Development and Treasurer [20]

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Yes. Art, this is Kevin. And I'd just add, I mean, we generated -- most of that cash we generated was from earnings, without us paying the dividend. We were able to -- to answer to your question is we were -- we grew inventory less than what our earnings allowed us to grow and so we paid down debt.

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Arthur Michael Winston, Pilot Advisors, L.P. - CEO, President, and Chief Operations Officer [21]

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Excellent. Would it be fair to say that on an apples-to-apples basis, the cost of the inventory or the units in inventory isn't much higher than it was a year ago, apples-to-apples per unit?

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Phillip G. Creek, M/I Homes, Inc. - Executive VP, CFO & Director [22]

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No. Not unit per unit, it means there's a lot more volume. And if you look how much closings were up in the fourth quarter and the year, there was more unit volume close as opposed to the cost of the units because our average sale price actually come down a little bit.

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Arthur Michael Winston, Pilot Advisors, L.P. - CEO, President, and Chief Operations Officer [23]

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No that's -- I mean my question is, are you having to pay up very much to buy the raw land and the completed lots? Is it going up appreciably or is it just going up a little?

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Robert H. Schottenstein, M/I Homes, Inc. - Chairman, President & CEO [24]

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I think our average finished lot cost is roughly equivalent to what it was a year ago. It's probably within $1,000 or $2,000. I don't have the number.

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Phillip G. Creek, M/I Homes, Inc. - Executive VP, CFO & Director [25]

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Yes, around $80,000.

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Robert H. Schottenstein, M/I Homes, Inc. - Chairman, President & CEO [26]

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It was like $80,000 a year ago. It's like $79,000 right now. Look, the land markets are competitive, they're tight. The good sites aren't becoming less expensive. I think we've just been able to manage through it so far. But if housing continues to run the way it is, I think we'll see a little bit of inflation on the land side.

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Phillip G. Creek, M/I Homes, Inc. - Executive VP, CFO & Director [27]

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And also, Art, when you look at the land cost, we talked about the average sale price in backlog of a Smart Series house being $302,000. I mean, the land price per Smart Series lot is less than our more higher-priced stuff. So that also enters into the equation as far as keeping that land price pretty flat.

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Robert H. Schottenstein, M/I Homes, Inc. - Chairman, President & CEO [28]

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I think one other thing and it's sort of maybe slightly related to your question, Art, is we have a very strong land position, at least we believe that we do. And we control just under a 5-year supply. The great thing about our land position is that quite a bit less than half of it is on our books.

When you compare us to other builders, you'll typically see at least 50%, if not 60-or-so percent of their owned land is already acquired, which sort of means there's no turning back. And -- look, we don't want to turn back or walk away from any deals, but we've got a lot more under contract that we control rather than already owned, which I think is just a safety net.

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Operator [29]

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Your next question comes from the line of Jay McCanless from Wedbush.

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Jay McCanless, Wedbush Securities Inc., Research Division - SVP of Equity Research [30]

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Can you hear me?

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Robert H. Schottenstein, M/I Homes, Inc. - Chairman, President & CEO [31]

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Yes. We can hear you fine. We thought we lost everybody.

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Jay McCanless, Wedbush Securities Inc., Research Division - SVP of Equity Research [32]

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No. We're still here. So I want to ask 2, 3 questions on SG&A. The first one, is there any tailwind, Phil, that we might see dollar-wise for spending you all may have done on D.C. in '19 that isn't going to repeat in '20?

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Phillip G. Creek, M/I Homes, Inc. - Executive VP, CFO & Director [33]

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Not really. As far as D.C., we're down to a couple of people. So those costs are pretty much passed us. Jay, I'm sure you heard the explanation that we did give for SG&A.

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Robert H. Schottenstein, M/I Homes, Inc. - Chairman, President & CEO [34]

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No, excuse me, I think he was asking if we expensed a lot of stuff last year than we won't have to expense this year.

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Ann Marie W. Hunker, M/I Homes, Inc. - VP & Corporate Controller [35]

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No, no, continue.

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Phillip G. Creek, M/I Homes, Inc. - Executive VP, CFO & Director [36]

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No. It's...

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Robert H. Schottenstein, M/I Homes, Inc. - Chairman, President & CEO [37]

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It's really pretty much about...

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Phillip G. Creek, M/I Homes, Inc. - Executive VP, CFO & Director [38]

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And as far as -- SG&A expenses can be a little lumpy at sometimes. Bonuses and those type of things, you tend to book more as the earnings are made. And that's part of the reason also. Also, another thing in SG&A is opening a lot of new communities. The way we treat those new communities is that a pretty significant amount of those dollars are expensed as we open up those new sales centers as we construct those sales centers as we put furniture in there, technology, brochures, have broker functions and those type of things. When you get into opening new communities, it's not unusual to spend $25,000 to $50,000 per sales center, and those things are expensed. And there was a lot of new communities opened in the fourth quarter. So those were a couple of the reasons it was a little bit higher in the fourth quarter, Jay.

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Jay McCanless, Wedbush Securities Inc., Research Division - SVP of Equity Research [39]

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Yes. And that actually leads into my next question. When we think about the growth in community count this year, is it going to be pretty even? Or you're going to have a weighting of 1 quarter or 2 quarters getting more to openings?

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Phillip G. Creek, M/I Homes, Inc. - Executive VP, CFO & Director [40]

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If you look at 2019, it was kind of, what, 42 the first half and 38 the second. So it was about 50% the first half, 60% percent the second half looks to us like it will be pretty similar to that again this year. But again, looking for like a 5% average growth during the year.

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Jay McCanless, Wedbush Securities Inc., Research Division - SVP of Equity Research [41]

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And then the other question I had on SG&A. Should we -- if we look at the dollar amount spent in 1Q '19, 2Q '19, should we think about adding some to that just for the IT upgrades you were talking about?

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Phillip G. Creek, M/I Homes, Inc. - Executive VP, CFO & Director [42]

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No. I wouldn't necessarily do that. I mean when you look at our year in 2019, revenue was up almost 10%, SG&A expenses were up 8%. If you look today, our headcount is up about 4%. So obviously, there will be some cost increases because we are a larger company, we have more people. We will still be opening a number of stores. Are we trying to have at least 10% revenue growth? Yes, the answer is yes. So it's hard to give any specific guidance. As we said in our comments, we really are working hard to get operating efficiencies. But one of the challenges is we are having a lower average sale price come through and that impacts it. But again, we still hope to get operating efficiencies. The good thing also, if you look for the year, pretax went from $6.2 million to $6.6 million. When you look at the fourth quarter pretax, the fourth quarter pretax was $6.9 million versus $6.1 million. So we are getting better returns. And so we're making progress, but SG&A can be a little lumpy now than quarter-to-quarter.

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Jay McCanless, Wedbush Securities Inc., Research Division - SVP of Equity Research [43]

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Got it. And that was -- and actually, on the price side, that was the next thing I was going to ask. I mean, we're assuming for '20 that average closing prices and average backlog prices, basically, in '20, about the same levels they did in '19. Is that what you guys are seeing in your community count right now? Or should we think about it taking down 1% or 2%?

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Phillip G. Creek, M/I Homes, Inc. - Executive VP, CFO & Director [44]

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It's -- if you're talking about average sale price, Jay...

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Jay McCanless, Wedbush Securities Inc., Research Division - SVP of Equity Research [45]

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Yes.

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Phillip G. Creek, M/I Homes, Inc. - Executive VP, CFO & Director [46]

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I mean, as Smart Series continues to increase a little bit, we would tend to think it's going to be in that 2% to 3% downward range overall ASP. That's hard to predict, but that's kind of what our thoughts are.

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Robert H. Schottenstein, M/I Homes, Inc. - Chairman, President & CEO [47]

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It should slightly moderate down.

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Phillip G. Creek, M/I Homes, Inc. - Executive VP, CFO & Director [48]

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It's kind of hard to predict, Jay, because as you know, we do about 40%, 45% specs. So that's a pretty good moving target. But we're very focused on margin improvement. As Bob said, we're still opening a lot of stores. You tend to have pricing power when you have something a little different, a little better product in a better location. But our thoughts, our ASP would be down 2% or 3%.

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Jay McCanless, Wedbush Securities Inc., Research Division - SVP of Equity Research [49]

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Okay. That's great. And then the last question I had, on Smart Series and on some of your more entry-level price communities, what type of behavior are you seeing from competitors? Is there still a decent amount of discounting and incentives out there? Are people being more aggressive with price? Any insight you can give there would be helpful.

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Robert H. Schottenstein, M/I Homes, Inc. - Chairman, President & CEO [50]

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We have been able -- first of all, we've had, I think, really good success in most of our Smart Series communities. So is there competition? You bet there is. And frankly, some of the most successful Smart Series communities in our company are in some of the most competitive markets like Houston and San Antonio in terms of affordable offerings by other builders. We haven't been impacted by a lot of discounting from other builders. I know some of it goes on and every now and then we do it too. But I don't consider that a big issue.

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Phillip G. Creek, M/I Homes, Inc. - Executive VP, CFO & Director [51]

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I mean -- as we said, Jay, I mean, our Smart Series has above-company average pace and has above-company average margins. So we've been very pleased with our product line.

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Operator [52]

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(Operator Instructions) We have a follow-up question from Alex Barrón from Housing Research Center.

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Alex Barrón, Housing Research Center, LLC - Founder and Senior Research Analyst [53]

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At the beginning of 2019, the year was pretty slow and eventually, I think, got better and you guys still managed to get 20 basis points of operating leverage. Do you feel, given the stronger conditions this year, that maybe you could get at least that or more this year?

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Phillip G. Creek, M/I Homes, Inc. - Executive VP, CFO & Director [54]

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Well, when you're looking at the SG&A line, yes, that did improve 20 basis points. When you look at the bottom pretax line for the year, it actually went from, what, $6.2 million to $6.6 million. So it's a 40 basis points improvement. Alex, we're always focused on income increases. We are continuing to invest more of our business for growth the next year or 2. So it's a challenge to always keep all the metrics go in the right way. But are we focused on improving our income percent and our SG&A leverage? We sure are. We're also pretty pleased that our interest incurred has kind of flattened out. We think there's a little room on margins. So there's a lot of different moving parts affecting that equation, overall. We talked about our strong ROE. So there's a lot of things we're focusing on.

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Operator [55]

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(Operator Instructions) There are no further questions at this time. Presenters, you may proceed.

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Phillip G. Creek, M/I Homes, Inc. - Executive VP, CFO & Director [56]

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Thank you very much. Look forward to talking to you next quarter.

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Operator [57]

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Ladies and gentlemen, that concludes today's conference call. Thank you all for joining. You may now all disconnect.