M/I Homes Inc (MHO) 2011 Q4 法說會逐字稿

Good afternoon, my name is Keena, and I will be your conference operator today. At this time, I would like to welcome everyone to the M/I Homes year-end conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. Mr. Creek, you may begin your conference.

Thank you very much for joining us today. Joining me on the call is Bob Schottenstein, our CEO and President; Tom Mason, our EVP; Paul Rosen, President of our Mortgage Company; Ann Marie Hunker, our VP, Corporate Controller; and Kevin Hake, our 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.

With that, I'll turn the call over to Bob.

Thanks, Phil. Good afternoon, and thank you for joining our call to review our year-end results. I'm very pleased to report positive pretax income from operations for our 2011 fourth quarter of $1.4 million. This represents a significant improvement from the operating loss of $2.4 million in last year's fourth quarter and continues our trend of quarter-by-quarter improvement in our operating results during the year. We were able to achieve this operating profit despite higher interest expense in this year's fourth quarter resulting from the refinancing of our senior notes back in November 2010.

The improvement in our performance results from a number of factors, including controlling costs, improved operating efficiencies, and increasingly better gross margins. Specifically with respect to margins, our gross margins for the fourth quarter were 18.4%, and improved sequentially in each quarter during the year. This improvement, which is 230 basis points better than last year's fourth quarter, is largely due to a strategic shift in our mix of communities towards newer, better performing locations in better performing housing markets. We successfully opened 46 new communities during 2011 and increased our community count, company-wide, by 11% during the year, with the Southern and Mid-Atlantic regions count increasing by 47% and 17%, respectively. For the quarter, nearly 70% of our deliveries came from new communities, and we define new communities as those that have opened for business since January 2009. This 70% delivery percentage compares with 40% of deliveries coming from new communities a year ago, and 60% of deliveries coming from new communities in the third quarter.

Our new contracts for the fourth quarter increased 10% from the fourth quarter of 2010. Our backlog sales value at quarter end was 34% higher than a year ago, and our backlog in units is 27% higher than a year ago, which represents the highest year-end unit backlog level since 2007.

Clearly, housing demand continues to be negatively impacted by economic uncertainty, not just within the United States but throughout the world, high unemployment, low levels of consumer confidence, and excess supply of both new and existing homes. These conditions, combined with tight consumer and mortgage credit, have also created challenges for potential buyers in selling their existing home. However, many of these macro-economic factors have shown some improvement over the past few months, and there are encouraging signs which have resulted in a greater sense of optimism as we enter 2012. In that regard, many analysts are projecting an increase of 10% to 20%, or more, in new home sales in 2012.

Let me turn to our regional performance before making some closing comments and, then, turning the call back over to Phil. First, our Midwest region. Overall conditions in our Midwest housing markets continue to be challenging. That said, Chicago continues to be a very good performer for us, as a result of well-located and competitively priced communities. We're also performing reasonably well in Indianapolis. In the Midwest, our deliveries declined 24% for the fourth quarter, compared with last year, while our new contracts in this region were off 11% for the quarter. We ended the year with 59 active communities in the Midwest, which is a 3% decrease from the end of last year, and we reduced our overall investment in the Midwest, despite consciously and intentionally growing our investment and our communities in Chicago. Our total lots controlled in the Midwest are down 15% from a year ago, largely as a result of the aforementioned continued strategy to shift investment towards our Southern and Mid-Atlantic regions.

Speaking of the Southern region, our Southern region is comprised of Florida and Texas. We entered the Houston market in late-2010, and we purchased a small San Antonio builder in the second quarter of 2011. Both of these markets in Texas remain high on the list of market rankings in terms of job growth and overall economic conditions. In our Florida markets, market conditions and demand for new homes continue to be challenging, though we've seen some improvement recently and have clearly had some success with certain new communities in select locations.

Overall, our new contracts in the Southern region increased 63% in the fourth quarter, compared with the prior year, and our deliveries in the Southern region were up over 60%, as well. Clearly, this increase was impacted by our new Texas operations, but I want to underscore that our Florida deliveries and our Florida contracts were also up substantially. Our backlog value in the Southern region at the end of the year was double that from a year ago. We ended the quarter with 28 active communities in the Southern region, which is a 47% increase, and our total controlled lot position in the South is up 52% year over year.

Last, the Mid-Atlantic region. This continues to be our strongest performing region in terms of margins and profitability. Raleigh is one of our best performing divisions, and Charlotte continues to get better and perform well, despite being a highly competitive housing market. Likewise, Washington, DC, continues to be one of the healthiest markets in the nation for demand but, candidly, we've seen a slight slowdown there over the past few months, as increased competitive pressures has caused a slight reduction in margins, in order for us to achieve our targeted level of sales. Total new contracts in our mid-Atlantic region were up 7% for the quarter, compared with [2011], and deliveries were up 12%. Backlog value is 24% ahead of a year ago. We ended the quarter with 35 active communities in this region and, as I noted earlier, that represents a 17% increase from the prior year. Our total lots controlled in the Mid-Atlantic region are up 5% from last year.

By way of concluding comments, let me just say that we've taken a number of what we consider to be very positive steps to position our company for profitability and improved market position in 2012 and beyond, starting with a focus on investing in profitable new communities. We've reduced our expenses company-wide in 2011, and we'll continue to manage our costs very carefully going forward. We've also made very solid progress in lowering our construction costs, which has helped us maintain sales and margins, even with continued competitive pressures on sales prices. We believe our product is well positioned to meet consumer demand as we enter the 2012 spring selling season. And, we feel very good about our position in all of our markets and are excited about the prospects for our future and continued growth and profitability. We continue to remain highly focused on quality and customer satisfaction. Our customer satisfaction scores, as measured by an independent party, are at the highest levels in company history. Finally, let me state that we feel very good about our fourth quarter performance and our continued improvement on so many fronts. We are excited about 2012 and, as noted in the press release, remain relentlessly focused on returning to full-year profitability. And, with that, I'll turn it over to Phil.

Thanks, Bob. New contracts for the fourth quarter increased 10%, to 505, with a net absorption rate of 1.7 sales per community per month. By region, contracts were down 11% in the Midwest, up 63% in the South, and up 7% in the Mid-Atlantic.

And, our cancellation rate for the fourth quarter was 23%, compared to last year's 25%.

Our traffic for the quarter increased 30%. Our sales were up 40% in October, and traffic was up 26%. Sales were down 22% in November, while traffic was up 24%. And, our sales were up 12% in December, and traffic was up 51%.

Our active communities increased 11%, from 110 last year to 122, and the breakdown by region is 59 in the Midwest, 28 in the South, and 35 in the Mid-Atlantic. During the quarter, we opened 9 new communities, while closing 7, and, for the year, we opened 46 new communities and closed 34. At December 31, 65% of those communities that we are selling out are new, those that opened since January 2009. And, our current plans for 2012 are to increase our community count by 5% to 10%, depending on sales and market conditions.

We delivered 667 homes in 2011's fourth quarter, up 3%, when comparing to 2010's 650 deliveries. And, 70% of our fourth-quarter deliveries were from new communities, compared to 60% in the third quarter. We delivered 80% of our backlog this quarter, compared to 90% a year ago. Our backlog of 676 homes is 27% higher than a year ago, and our average sale price in backlog of $267,000 is 5% higher.

We did not have any third-party land sales in 2011's fourth quarter, in comparison to $1.3 million in 2010's fourth quarter.

And, in the fourth quarter, we recorded pretax charges for impairments of $4 million, and, for the 12 months, total charges were $22 million. The majority of the fourth quarter inventory charges were from older assets in our Midwest region.

Our gross margin exclusive of the impact of impairments was 18.4% for the quarter, up 230 basis points year over year, and 50 basis points higher than the prior quarter. For the full year, our gross margins improved 80 basis points, to 17.5%.

G&A Expenses for the quarter were $14.6 million, increasing 2% from last year's comparable expenses. And, Selling Expenses for the quarter increased $1.3 million, up 11% from a year ago. These expenses were up primarily as a result of volume increases and additional spend related to our two new Texas markets. SG&A totaled $28 million, or 15.6% of revenue, in the fourth quarter, and this compares to 15.7% in last year's fourth quarter.

Interest expense increased $878,000 for the quarter and increased $5.6 million for the 12 months of 2011, compared to last year. And, interest incurred was $5.7 million in the fourth quarter of 2011, compared to 2010's fourth quarter of $4.9 million. The increase this year was due to the impact of our senior notes, which were issued in the fourth quarter of 2010.

We had $1.4 million in pretax income from operations for the fourth quarter, compared to a $2.4 million loss during the fourth quarter last year, with deliveries being about equal. For the full year, we had $10.9 million of pretax loss from operations, compared to a $7.7 million loss, with gross margin improvement being offset by lower homes delivered and higher interest expense.

We generated our 10th consecutive quarter of positive EBITDA, producing $11 million of EBITDA for the quarter and $23 million for the year.

We have $19 million in capitalized interest on our balance sheet, compared to $20 million a year ago, which is about 3% of our assets.

We reported a non-cash, after-tax charge of $1.3 million in the fourth quarter for a valuation allowance related to our deferred tax assets. And, at December 31, 2011, our gross deferred tax asset is $141 million, and it is fully reserved.

Now, Paul Rosen will address our mortgage company results.

Thanks, Phil. Our mortgage and title operations pretax income increased from $1.1 million, in 2010's fourth quarter, to $2.1 million in the same period of 2011. Loans originated increased from 526, in 2010, to 547, in 2011. Our fourth quarter results included increased income attributable to higher margins on loans sold and the addition of a limited amount of previous homebuyer refinances.

We have seen a shift towards conventional financing. The loan to value ratio on our first mortgages for the fourth quarter was 86%, in 2011, compared to 88%, in 2010's fourth quarter. 55% of the loans closed with conventional, and 45% were FHA/VA. This compares to 45% and 55%, respectively, for 2010, same period. Over 90% of our communities are eligible for FHA financing.

Overall, our average mortgage amount was $218,000, in 2011's fourth quarter, compared to [$219,000], in 2010's fourth quarter.

The average borrower credit score on mortgages originated by M/I Financial was 737, in the fourth quarter of 2011, compared to 734, in 2011's third quarter. These scores compare to 737, for the fourth quarter of 2010, and 731, for the third quarter of 2010.

Our mortgage operations captured approximately 83% of our business in the fourth quarter, compared to 2010's 84%.

At December 31, 2011, M/I Financial had [$52.6] million outstanding under the [$60] million MIF Credit Agreement. In the normal course of business, we receive inquiries concerning underwriting matters on specific mortgages that have been purchased from us. We thoroughly review and respond to each inquiry even though we are not required to do so. We routinely engage in independent third parties to review the files and information related to the origination of each mortgage. Our reserve at December 31, 2011, with respect to these matters was $2.3 million. M/I Financial has not repurchased any loans this year.

Now, I will turn the call back over to Phil.

Thanks, Paul. As far as our balance sheet, we continue to manage our balance sheet carefully, always focusing on investing carefully in new land, while managing our capital structure.

Total home building inventory at December 31, 2011, was $467 million, an increase of $16 million above last year levels, due to higher investment levels in home construction, primarily our backlog. Our unsold land investment at December 31, 2011, is $243 million, a 9% decrease compared to $266 million a year ago. Compared to a year ago, raw land and land under development decreased 30%, and finished unsold lots increased 11%. At December 31, we had $88 million of raw land and land under development, and $155 million of finished unsold lots. Our unsold finished lots totaled 3,000 lots, with an average cost of $51,000 per lot. And, this $51,000 average lot cost is 19% of our $267,000 backlog average sale price. And, the market breakdown of our $243 million of unsold land is $104 million in the Midwest, $40 million in the South, and $99 million in the Mid-Atlantic. Lots owned and controlled at December 31, 2011, totaled 10,400 lots, 69% of which were owned and 31% under contract. We own 7,200 lots, of which 55% are in the Midwest, 20% are in the South, and 25% in the Mid-Atlantic. This is a 5% decrease in owned lots, from 7,600 lots a year ago.

In 2011, we spent $72 million on land, and $45 million on land development, for a total of $117 million. This compares to total spending of $153 million in 2010. About 29% of our land purchases were in the Midwest, 36% in the Southern, and 35% in the Mid-Atlantic. And, as to the type of our 2011 land purchases, about 80% were finished lot pickups under contracts, 15% have been bulk finish lot purchases, and about 5% were raw land deals. Our estimate today for 2012 land spend is to be higher than 2011, as we hope to increase our homes delivered in 2012, and thereafter. Our sales and market conditions will, obviously, impact our spending.

And, at the end of the quarter, we had $85 million invested in specs -- 341 houses that were completed, and 232 specs in various stages of construction. This translates into about 5 specs per community. And, of the 573 total specs, 236 are in the Midwest, 155 are in the Southern region, and 182 were in the Mid-Atlantic. At December 31, 2010, we had 561 specs, with an investment of $74 million. And, at September 30, 2011, we had 638 specs, with an investment of $81 million.

We continually focus on cash and liquidity. We ended the quarter with $101 million of cash, which includes $51 million of unrestricted cash. At December 31, the Company had no borrowings under our $140 million credit facility. Our borrowing availability under this facility, net of outstanding letters of credit, was $52 million at year end, based on the value of pledged assets. And, the remaining $41 million of senior notes mature in April 2012. We have various alternatives to repay the notes, including using cash and borrowing under our credit facility. And, earlier this week, we closed on an extension of our credit facility. The maturity date was extended by 18 months, to December 2014.

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

(Operator Instructions) Your first question comes from Ivy Zellman of Zellman & Associates.

Good afternoon, guys. I actually wanted to congratulate you. I thought your margin performance was very positive and certainly was happy to see your order [grow]. I think the stock is under pressure today without a lot of (technical difficulty) reports, maybe because of the maturities of the $40 million coming due. So, from a timing perspective, I guess you're in the market or considering your options. Is there something that you'll be able to finalize shortly, within the next several weeks? Or, is that something that we'll have to just wait to see what happens in April? That's my first question.

Phil, you want to take that? I'm not sure if I can respond.

I'm not sure I understand what the --.

Hi, this is Kevin. The comment that we've been making and that Phil made it, just a minute ago, again, is that we expect to take out the $41 million of notes, using available cash and availability under our revolving credit.

Some combination, yes.

OK. So, you're not considering other options, like doing another debt offering or anything?

We're always considering other options. We're aware of the couple of other builders that have come to the market in the last couple of days. We're aware of the reduction in rate that they're paying, but our needs are smaller than the dollars that -- we'd be sitting on a whole bunch of cash to do that and don't think that's prudent.

OK.

And, I think, also, Ivy, one of the big things is that, as Bob said, we're really, really focused on getting back to consistent profitability, and we think, when we look at the demand we're seeing in the marketplace, we have 3,000 finished lots on the books, with 4,000 lots raw or under development behind those. I mean, we're not seeing a tremendous number of new land deals that make a whole lot of sense. So, we think we can grow our business pretty well, and don't really need to incur, at least right now, any additional interest expense. But, again, that's something we always take looks at.

I appreciate that. And, then, just more focused on the operations, your 19.6% gross margin is much higher than your peers. And, you've been entering new markets opportunistically. Obviously, the performance in Raleigh and Chicago and in Texas. When we think about gross margins going forward and recognizing the improvement that you've already generated, should we think that margins can go higher from here? How should we be thinking about the margins with the new communities that you've opened up and the success you've had?

First of all, thanks for the question. I think that we hope that they can still go a little bit higher. I think that there was some low fruit, initially, that we've -- let's face it, they were quite low as many other builders were. And, we've had a lot of success with our new communities. A year ago, 40% of closings came from new communities. In the last quarter, 70% of closings came from new communities. That percentage continues to rise quarter by quarter by quarter. Our margins in new communities, as we reported at the last call, on average, were slightly north of 19%, whereas our margins in legacy communities were somewhere slightly south of 15%. So, as a greater percentage keep coming from the new communities, we'll expect some improvement in margins. That's really without taking into account any material improvement in general conditions.

And then, just lastly, if I could sneak another one in with respect to current business activity, recognizing that we're seeing a continued improvement into January. If you can comment just on, starting 2012, on how January looks relative to your expectations? And, then, just thinking about the full year, are you in the camp that 2012 is a up year? I know you commented earlier, but maybe you can elaborate a little bit, Bob, if you would please?

First of all, as far as January, we're not really providing -- we haven't for a number of years, now -- any guidance on the current month or any forward months, and we're not going to comment on what our expectation is in terms of guidance for the full year. There's no question what our goal is, and that's to be profitable.

In terms of where we are in the market, I think we probably have bottomed out. I'd like to believe that we have. I think that there is some logic to a lot of the comments that have been made by you and a number of other builders along those lines. But, I also think that there's still a lot of uncertainty, and I don't want to paint any kind of negativity. There's been enough of that painted already.

But, we think we're well positioned right now. We're also well positioned to take advantage of things that are coming up from time to time in each of our markets, relative to new land, new locations, and so forth. We do look to continue to grow this year. We feel as good about our footprint as we ever have. I think that over the last three to four years -- I know sometime there's a very intense focus on, what have you done during the last quarter, but I think over the last three to four years, during the bulk of this downturn, our sales comps have been quite strong, particularly back in late-2008 and into 2009 and early-2010. We had some of the best sales comps in the industry. And, so, you're at a certain level that you're always looking back to. And, it's not to make excuses or anything, but we feel very good about the fact that, in virtually every one of our markets, our market share has grown quite a bit over the last two or three years. And, feel great about the Chicago operation. Very excited about our future in Texas. We're really just getting started there. We're essentially still brand new in Houston and acquired a very small builder in San Antonio.

So, as I said, we feel very good about how the year ended. We're excited about this year, and we're going to be relentlessly focused on our goal.

OK. Great. Thanks, guys.

Thank you.

Your next question comes from Joel Locker, FBN Securities.

Hey, guys.

Hi, Joel.

Nice quarter. Just was looking at your G&A for the year. It was around $53 million, or so. If you're looking at 2012, would you say that it would be similar? Or, would it actually rise a little bit because of the community count?

You know, Joel, we don't give estimates on that type of thing. We talked last year about all we could do to bring that down and control it. I think we made pretty good progress. We are just getting started in Texas. Hopefully, our business will grow there. As Bob said, we are focused very much on being profitable and growing. But, again, we're very focused on costs, trying to get efficiencies out of our SG&A line. But, really, don't make projections on those type of things.

Right. And, what about community count? You opened up 46 in 2011. From your pipeline that you're looking at today, would you expect a similar number?

In my comments, what I said is our plan right now, during 2012, to grow our community count by 5% to 10%.

Right.

And, again, that depends on how our business is and the markets. But, right now, we're looking at 5% to 10% for the year.

Right. And, last one before I jump back in the queue, the closing ASP jumped nicely in the fourth quarter. Was wondering, where do you expect that going forward? It's been anywhere between $227,000 and $257,000, in 2011. And, just ballpark range of where you expect it to be in 2012?

Well, if you look at our average sale price in backlog the last couple of quarters, we had $252,000 at the end of March; $257,000 at June 30; then, $266,000; and $267,000. So, we have had a nice little rise there. Again, not making any projections about that, but you know us. We really prefer to be more first, second move-up. More of our business today, than ever, has been first time. But, we do try to put more features and benefits in our house and hope to get paid for it. So, hopefully, our average sale price will stay pretty strong.

All right. Thanks a lot.

Your next question comes from Steven Kim, Barclays.

Hey, guys. Thanks for taking the question. I had a couple of -- one of the things may be a bit of a repeat. I apologize. But, can you give us the interest incurred again, in the quarter? And, then, what was expensed through cost of goods sold? And, once again, what your ending capitalized interest balance was? I think you said $20 million but, if you could give us some more decimals, that'd be great.

Yes, I'll start off and give a couple of numbers. And, Ann Marie may need to jump in here. If you look at interest expense, as far as what actually was incurred, we actually incurred $5.7 million in the fourth quarter. And, that compares to 2010's fourth quarter interest incurred of $4.9 million. And, at the end of the year, we had $19 million of capitalized interest on the balance sheet, compared to $20 million a year ago.

OK. And, our interest amortized to cost of sales in the fourth quarter was $3.3 million.

OK. Got it. And, perfect. Great. The second question relates to your overall sales activity. I was curious if you could comment on if there's been any change in the buyers that you've been seeing over the course of the last couple of months? If there's been, let's say, more action from folks who have nothing to sell, but are not exactly first-time buyers, either? Folks who may have, for one reason or another, opportunistically or for some other reason, sold the house they had, and have been in, sort of, a temporary situation, and are now coming back into the market. Not quite your typical first-time buyer, but without a house to sell. Have you seen some of that, or any other discernible trend of note?

Hi, Steve. The comment I would make on that is, the only discernible trend that I think that is worth noting is that we've seen an increase in traffic. And, also, while it's still a fight to get a lot of folks qualified, and that's a whole other set of issues, the point is, against the backdrop of where we are now versus where we were -- and, it is market to market to be sure -- but, across the board, broadly described, there is an uptick in traffic. And, I think that within some of that traffic, that greater sense of optimism which -- at some point, I think people just can't take it anymore. So, they want to be optimistic. And, maybe, that's what's driving it. On the other hand, there are some positive signs in the economy, to be sure. A lot of the markets that we do business in are beginning to see some decent job growth and a little bit of light at the end of the tunnel. And, that's probably fueling some of that additional traffic. Not to mention the fact that, as we all know, there's never been a better time to buy. And, maybe, people are finally starting to get that hint. So, I think the trend is, the traffic is up. And, the traffic that's out there seems to have a little bit more desire, will, and excitement about moving forward.

Thanks a lot for that. I appreciate that. There was one other question, if I could ask it, about pricing trends in the industry. A couple of other builders have begun to mention that they got a little more aggressive on pricing in the most recent quarter. And, you had mentioned something about that, I think, in one of your regions, that you were starting to see a little bit more --

Yes, in DC, in particular.

Yes. Could you talk a little bit about whether or not you're starting to see that pop up more? How are you finding that builders are responding to that, when it emerges? Just so we can get some sort of a read for where trends are headed over the next few quarters.

Well, that's a hard one. And, I'll give you my thoughts and, then, see if anyone else wants to jump in. I think, sometimes, price cutting and incentives may intensify a little bit in the end of the year to drive closings, particularly in, maybe, legacy communities or communities where builders are selling out of their lots, and so forth. But, in DC, we probably saw a little bit more pressure on prices than in some of our other markets. And, it remains to be seen whether that will continue into the spring selling season. I can't comment on it any further than that.

And, we try to be very, very careful as we open new communities. Only release a certain number of lots. See what the demand really is. There are still certain issues with appraisals, and so forth. Demand is still challenging, Steve. So, hopefully, in the communities where we've got something a little different, we're in a premier location. Where we have a little pricing ability, we try to raise prices. But, again, you're always trying to balance all -- getting a certain amount of volume, trying to get to profitability and, also for us, we want to make sure our liquidity stays good, too. So, we try to manage all those things together.

OK. Great. Thanks a lot, guys.

Thank you, Steve.

Your next question comes from Alex Barron, Housing Research.

Thanks. Hi, guys.

Hey, Alex.

I wanted to just ask a question I've been asking other builders. As we think about the downturn, it's already been six-plus years. And, so, there's been enough time elapsed where people defaulted early in the cycle, went through short sale, foreclosure, what have you. They've been renting homes. Have you guys started to see some of those people come back into the market? Are they qualifying for mortgages, yet? What are you hearing from your sales people with regards to that?

I want to let Paul Rosen, who runs our mortgage company, take a crack at that one.

Alex, between short sale, foreclosure, and bankruptcy -- and, I think I want to handle all of those together, because they really come to us, sometimes in combination, but they look relatively the same to us. Depending on loan to value, there's a 2- to 3-year delay on when they can purchase. We are seeing customers come in. I haven't seen a significant uptick in the volume, but there are customers who come in who are in that cycle. So, some come in too early and have to come back in a year, or so. But, we are starting to see some customers who are passed that 2-year window, who are ready to purchase. And, they usually have their down payments, and they're usually in pretty good condition, when they come in to purchase.

OK. And, do you guys have any specific strategy in place to try to help those buyers get over the goal line? Or, do you just let them fix their credit, or whatever, on their own?

Paying on time and time are the two things that it takes them. We will discuss issues with customers. Although we don't do significant credit counseling, we do have some programs for customers that just need a little bit of help. But, as I say, generally by the time they come in to purchase, they've gone through that 2-plus-year period, and they are paying their bills on time. So, time does a lot to clean up their credit reports.

Got it. And, on the SG&A front, is there anything that you guys think you can do further to lower that, as a percentage, or absolute dollars, other than just the revenue, the top line, going up?

Well, we're obviously hoping to get efficiencies, Alex. We think we can do a little more with what we've got. Obviously, we had to staff up Texas to a certain degree but, again, those are things we stay on top of. But, again, we want to do a quality job, taking care of our customers. And, you do need a certain level there. We were pretty pleased that we did make money in the fourth quarter, below 700 houses. And, that's what we had talked about as a breakeven. So, again, everything stays on the table. So, that's something we focus on all the time.

All right. OK. Thanks, guys.

Thank you.

(Operator instructions) Your next question comes from Jay McCanless, Guggenheim.

Hey, good afternoon, everyone.

Hey, Jay.

First question, I wanted to ask, I guess, the SG&A and the spec question in a different way. Are you seeing enough quick move traffic coming into your neighborhoods? Or, is there still enough quick move traffic coming into the neighborhoods on a regular basis to justify five specs, on average, per community? And, if not, what should we expect going forward?

Jay, our spec level really hasn't moved much in a couple of years. What we have found during these difficult times is, with consumer confidence the way it is, with consumers concerned about pricing, it's harder and harder to keep people in a transaction for five, six, seven months. We are seeing a few more to-be-built dirt sales happening but, again, specs are something that we manage very closely. Oftentimes, the people do get to make a lot of their own selections. But, it's just something that we try to manage. And, we think with the market the way it is right now, that's the way we need to still be looking at it.

The only other thing I'd add -- and it's a great question -- we've never been a big spec builder, and we've always tried to approach it very conservatively. On the other hand, you open 46 new communities during a year, that's 46 against a total of roughly 120. So, that's a whole lot of new communities opening, and a number of communities closing. And, quite often, spec count will increase ever so slightly on the closeout end. As you work to get out, you maybe have one or two lots left, and you just spec them. And, that can influence that percentage that you referred to in your question. And then, of course, opening, you typically seed, maybe, one or two more specs when you open a new community. And, so, I think that sometimes -- it's like any number. And, your question pushes for it. You've got to pull away and look at the detail.

Right. And, my second question goes to that, somewhat. Do you expect -- I believe you said, net, you were expecting communities to be up 5% to 10% -- but, do you expect as much internal churn with the older communities, like you had this year? And, given what you said about DC and what's going on there, do you expect to push more money, maybe, into Texas or into Florida that may have, six months ago, been allocated for DC?

As far as the first question, Jay, the 5% to 10% increase in communities is a net number. It has the openings and the closings, both, in it. As far as where we put our capital, as Bob said, we're still very interested in trying to grow the Mid-Atlantic, which is Charlotte, Raleigh, DC. Those numbers always get tweaked a little bit, based on how our business is doing. We think in those markets, we have a pretty good, solid land position but, again, we're always looking to grow, especially in certain markets. We have seen a little uptick in Florida. Texas, we're just getting going. Our investment has tended to come down in the Midwest, where the markets remain a little more challenged. Plus, we had a longer land position. But, we'll be very careful investing. We actually invested a little less last year than we thought we would, based on what we saw in the land markets. But, again, that's something that we think we're pretty focused on.

OK. Thanks. And then, one more question if I could. The comments that you made earlier about not seeing as much land deals that would pencil out as you may have previously, does that open you up more to looking at another acquisition, whether it's a small builder or a large land purchase, rather than trying to find the land organically? And, what does the pipeline for those type of transactions look like right now?

The short answer is, no. I think the deal flow has slowed a little bit. There's not as many deals out there that meet our minimum thresholds. And, frankly, whether you buy a small builder or look at an isolated new community, you've still got to meet thresholds. And, the bigger the deal, the higher the threshold, because the greater the risk. But, I don't see any change in our strategy going forward, in terms of community count growth and looking for new deals and new locations.

And, we continue to work on a lot of things, Jay. There is a fair amount of competition for the A locations of what we're after. And, of course, we want to get those deals under good terms. So, it's always hard to predict what you are going to spend. We did say earlier that we do expect to spend more this year than last year but, again, that just depends on a lot of things.

OK. And then, Phil, one more question for you. I can't remember if you disclose it or not, but do you disclose how many closings each quarter each year actually came from specs?

No, we do not.

OK. Great. Thanks, everyone.

Thanks.

Your next question comes from the line of -- one moment. You have a follow-up question from Joel Locker.

(technical difficulty) a conversion. It's been around -- I guess it was 79% in 2010, for the year. Obviously, it won't be on each quarter. And, then, 78% in 2011. And, just with the higher percentage of, maybe, to-be-built orders going forward, do you think that's still attainable in 2012? Or, will that probably drop?

That's our number, Joel. I had hoped to deliver more than 80% in the fourth quarter. That's also impacted quite a bit by your spec level, and so forth, how many of those sell and close in the quarter. Last year, in the first quarter, it was 83%. But, again, don't give any projections on that. But, our backlog is higher. We do hope to increase our closings. The first quarter is always very challenging for us. From a closing, profitability standpoint, it tends to be a really challenging quarter for us, but that's something we're focused on, to try to get deals through the pipeline as soon as we can.

Right. All right. Thanks a lot, guys.

Thank you.

There are no further questions at this time.

OK. Well, we appreciate you joining us and look forward to talking to you next quarter.

Thanks.

This concludes today's M/I Homes year-end conference call. You may now disconnect.