M/I Homes Inc (MHO) 2012 Q1 法說會逐字稿

Good afternoon. My name is Tina, and I'll be your conference operator today. At this time, I would like to welcome everyone to the M/I Homes Incorporated first quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. Mr. Phil Creek, you may begin your conference.

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

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

Thanks, Phil. Good afternoon, everyone and I too want to thank you for joining us on our call today. Our first quarter results reflect what we believe to be slowly improving housing conditions. We sold 17% more homes than last year's first quarter, as we continue to capture our fair share and, in some cases, more than our fair share of the new home market.

Our backlog sales value was 33% higher than a year ago. Our operating gross margin of 18.1% reached its highest first quarter level in five years and is 180 basis points above last year's first quarter, largely due to a planned strategic shift in our mix of communities towards newer, better performing locations and our continued focus on shifting our investment to stronger housing markets.

In that regard, approximately 63% of our first quarter deliveries were from new communities. That is, those that we opened for sale since the start of 2009. This compares with 70% of our deliveries from new communities in the fourth quarter and 45% of our deliveries from new communities in the first quarter of last year. These newer communities performed better than our legacy communities in terms of both margins and sales. So this ongoing shift to a higher mix of new communities is driving our continued improvement in performance and trend towards consistent positive earnings.

While we experienced a net loss for the quarter, we materially and substantially reduced our loss compared to last year's first quarter. Specifically, we had a net loss of $3.2 million in the quarter compared to a net loss of $17 million a year ago. It's important to recognize that our first quarter is typically our weakest quarter due to the seasonality in new home sales. Thus despite reporting a loss, our results are indicative of the progress, we believe, we are making to return to consistent profitability.

We reported EBITDA of $4.9 million for the quarter, which is up 83% from last year's first quarter and represents our 11th consecutive quarter of positive EBITDA. We ended the quarter with $81 million in cash, of which we used about $42 million to retire the remaining balance of our 2012 senior notes that came due on April 2. We had no outstanding borrowings under our $140 million credit facility at quarter's end. Our balance sheet and liquidity remain strong, as Phil will discuss in more detail in a few minutes.

As mentioned in our release, we are encouraged by the recent improvement in housing conditions and believe that housing markets are beginning to gain some traction. At the same time, we also believe that markets are choppy and that the pace of the housing recovery remains uncertain. As a result, we will proceed carefully with our land investments and capital expenditures and continue to maintain tight controls on expenses as we will work to return to full-year profitability.

Let me take a couple of minutes to discuss our regions. First, the Midwest region. Our performance in Chicago continues to be strong despite a difficult local housing market there. Let me remind you that 2010 was our first full year of operations in Chicago and in a relatively short period of time, we have become one of the top four builders in the Chicago market, operating in a number of the Chicago area's best-performing communities.

We are also performing well in Indianapolis. Cincinnati continues to be challenging for us with respect to both sales and margins, however, it's worth noting that we experienced a strong and noticeable improvement in our new contracts in Cincinnati in the first quarter. The Columbus market is gaining traction, as first quarter permits were up 21% year-over-year and we remain the number one and leading builder in Columbus gaining market share there.

Our deliveries increased 9% in the Midwest for the first quarter compared with last year, while our new contracts in this region were up 18% for the quarter. We ended the quarter with 56 active communities in the Midwest, a 10% decrease from the first quarter of last year and we continued to reduce our overall investment in the Midwest, despite growing our investment by design and our community count in Chicago. Both the decrease in communities and reduction in investment level reflect our strategic shift towards our other operating regions.

Next, the Southern region, which is comprised of our Florida markets and Texas markets. Texas continues to be a relatively new geography for us and we are very excited about growing our operations in both San Antonio and Houston. We opened for sale in the Houston market in early 2011 and we closed on our San Antonio acquisition at the start of the second quarter in 2011.

Both of these Texas markets remain high on the list of national market rankings in terms of job growth and economic conditions. We had 14 communities in San Antonio and Houston combined at the end of the quarter. On April 1, we closed on the purchase of five additional communities in Houston and also acquired the operations of a small Houston builder, Triumph Homes, and hired the founding principal of Triumph to run our combined operations in Houston as our Area President. We believe we are well positioned to grow our Texas operations.

In Florida, market conditions and demand for new homes in both the Tampa and Orlando markets have clearly shown signs of improvement over the past few months. We continue to have success in both Tampa and Orlando. Our new contracts in the Southern region increased 35% in the first quarter compared to last year and closings were up 68% year-over-year.

These increases were impacted by our San Antonio acquisition that I noted earlier, as that occurred after last year's first quarter. But Florida deliveries and contracts were up notwithstanding the new operations in Texas. Our backlog value in the Southern region at March 31 was up 48% year-over-year. Our active communities in the Southern region increased 63% over last year and our total lots controlled in the Southern region is up 37% over last year.

Next the Mid-Atlantic region. Raleigh continues to be one of our top-performing divisions, as we have clearly established ourselves as one of the top two builders in the Raleigh market. Charlotte also continues to perform well for us despite being highly competitive. The Washington D.C. market continues to be relatively healthy housing market, but we have noticed a slowdown over the past several months with increased competitive pressures on margins, as well as a slight drop-off in sales.

For M/I Homes, total new contracts in the Mid-Atlantic region were flat for the first quarter compared with 2011, as a result of our slowdown in sales in D.C. Deliveries for us were also down 3% in the first quarter. On the other hand, our backlog value at quarter's end is up 28% due mostly to an increase in average sale price.

We ended the quarter with 35 active communities in the Mid-Atlantic region, which is a 17% increase from the past year and our total controlled lots in the Mid-Atlantic region is up 15% from last year. And finally, as I mentioned earlier, we can expect to continue to shift more of our geographic focus, as well as our investments to our Mid-Atlantic markets and our Texas and Florida markets.

And with that, I'll turn things over to Phil to more thoroughly discuss our financial results.

Thanks, Bob. New contracts for the quarter increased 17% to 764 with the net absorption rate of two sales per community per month. By region, contracts were up 18% in the Midwest, up 35% in the South, and up 1% in the Mid-Atlantic. And our cancellation rate for the first quarter was 14% compared to last year's 16%.

Our traffic for the quarter increased 37%. Our sales were down 10% in January, while traffic was up 29%. Sales were up 32% in February and traffic was up 47%. And our sales were up 27% in March and traffic was up 35%. Our active communities increased 10% from 111 last year to 122. And the breakdown by region is 56 in the Midwest, 31 in the South, and 35 in the Mid-Atlantic.

During the quarter, we opened 10 new communities, while also closing 10. At March 31, 68% of the communities we are selling [out of are] new and we define new communities are those that opened since January of 2009. And our current estimate is to end the year with about a 10% higher community count than we began 2012.

We delivered 507 homes in 2012's first quarter, up 15% when delivered to last year. And 63% of our first quarter deliveries were from new communities compared to 45% in the first quarter of 2011. We delivered 75% of our backlog this quarter compared to 83% a year ago. And our backlog of 933 homes is 25% higher than a year ago, and our average sale price in backlog of $269,000 is 7% higher.

Bob talked about our gross margins being 18.1%. G&A expenses for the quarter were $12.5 million, increasing 9% from last year's comparable expenses. And selling expenses for the quarter increased $2.4 million. These expenses were up primarily as a result of the increase in homes delivered, increase in our active communities and additional spend related to our new San Antonio, Texas market, which we entered in the second quarter of 2011. SG&A totaled $23 million or 17.9% of revenue in 2012's first quarter and this compares to $18.1 million in last year's first quarter.

Interest expense increased $571,000 for the quarter compared to the same period last year. And interest incurred was $5.9 million in the first quarter of 2012 compared to 2011's first quarter of $5.5 million. We had a $4.2 million pre-tax loss from operations in the first quarter compared to a $5.8 million loss during the first quarter of 2011. This improvement was a result of a 15% increase in deliveries and our gross margin improvement.

Our net loss for the quarter was $3.2 million compared to $17 million a year ago. And during the quarter, we recorded a $1.2 million tax benefit related to the favorable outcome of certain prior year tax positions. We generated our 11th consecutive quarter of positive EBITDA, producing $5 million and covering interest 1.1 times for the trailing four quarters. We have $18 million of capitalized interest on our balance sheet compared to $20 million a year ago. And we reported a non-cash after-tax charge of $1 million in the first quarter for a valuation allowance related to our deferred tax assets. And in March 31, our gross deferred tax asset is $142 million and it's fully reserved.

Now, Paul Rosen will address our Mortgage Company results.

Thank you, Phil. Our mortgage and title operations' pre-tax income increased from $1.4 million in 2011's first quarter to $2.1 million in the same period of 2012. The main reason for the increase is that loans originated increased 38% from 334 in 2011 to 461 in 2012. Our first quarter results included increased income attributable to higher margins on the loans sold in addition to our refinance business. In 2012's first quarter, we originated $18 million in refinanced loans.

We continue to see a shift towards conventional financing. 55% of the loans closed were conventional and 45% were FHA, VA. This compares to 38% and 62% respectively for 2011 same period. Loan-to-value on our first mortgages for the first quarter was 86% in 2012 compared to 88% in 2011's first quarter.

Overall, our average mortgage amount was $211,000 in 2012's first quarter compared to $213,000 in 2011's first quarter. The average borrower credit score on mortgage originated by M/I Financial was 738 in the first quarter of 2012 compared to 737 in 2011's fourth quarter. Our mortgage operation captured 81% of our business in the first quarter compared to 2011's 83%.

On March 23, 2012, we signed an amendment and increased our M/I Financial credit commitment to $70 million and extended the maturity date to March 30, 2013. At March 31, 2012, M/I Financial has $42 million outstanding under the credit agreement.

In the normal course of business, we received inquiries concerning underwriting matters on specific mortgages our investors have purchased from us. We thoroughly review and respond to each inquiry and even though we are not required to do so, we routinely engage an independent third party to review the files and information related to the origination of each mortgage. Our reserve at March 31, 2012 with respect to these matters was $2.2 million compared to $2.3 million at December 31, 2011. 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, focusing on investing carefully in land, while also managing our capital structure. Total homebuilding inventory at March 31 was $490 million, an increase of $47 million above a year ago, primarily due to higher investment in our backlog. Our unsold land investment in March 31 is $249 million, a 4% decrease compared to $258 million a year ago.

Compared to a year ago, raw land and land under development decreased 15% and finished unsold lots increased 7%. At March 31, we had $105 million of raw land and land under development and $144 million of finished unsold lots. Our unsold finished lots totaled 2,800 lots with an average cost of $52,000 per lot. And this $52,000 average lot cost is 19% of our $269,000 backlog average sale price. And the market breakdown of our $249 million of unsold land is $96 million in the Midwest, $40 million in the South, and $113 million in the Mid-Atlantic.

Lots owned and controlled at March 31 totaled 10,400, 66% of which were owned and 34% under contract. We owned 6,900 lots, of which 50% are in the Midwest, 20% are in the South, and 30% in the Mid-Atlantic. And this is a 9% decrease in owned lots from 7,600 lots a year ago.

During the first quarter, we spent $30 million on land and $9 million on land development for a total spend of $39 million. This compares to total spending of $27 million in 2011's first quarter. About 10% of our land purchases were in the Midwest, 22% in the South, and 68% in the Mid-Atlantic. And as to the type of our 2012 land purchases, about 84% were finished lot pickups under option contracts, 11% have been bulk finished lot purchases, and 5% were raw land deals.

Our estimate today for 2012 land spending is higher than last year's $117 million, as we plan to increase our homes delivered this year. Of course, our sales and market conditions will impact our spending. At the end of the quarter, we had $66 million invested in specs, 244 specs that were completed and 255 specs in various stages of construction. This translates into about 4 specs per community. And of the 499 total specs, 192 are in the Midwest, 150 are in the South, and 157 are in the Mid-Atlantic.

At March 31, 2011, we had 441 specs with an investment of $55 million. And at 12/31/11, we had 573 specs with an investment of $85 million. We continually focus on cash and liquidity. We ended the quarter with $81 million of cash, which includes $67 million of unrestricted cash.

On April 2, we repaid in full the $41 million remaining balance of our 2012 senior notes. At March 31, the Company had no borrowings under our $140 million credit facility, which matures December 2014. Our borrowing availability under this facility, net of outstanding letters of credit, was $48 million at quarter-end based on the value of pledged assets.

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

(Operator Instructions) Ivy Zelman, Zelman & Associates.

Thank you. Good afternoon, guys. You obviously have had pretty nice improvement and so you're excited about finally seeing the beginnings of the recovery. Your profitability has been improving, but the volume has been lagging relative to some of your peers. And it looks like the Mid-Atlantic specifically is a little bit soft, which would actually be a little bit different than some of your other competitors have been reporting like NVR.

And you had said last quarter that you expected, you would see some pricing pressure there over the next couple of quarters. But your backlog price actually went up in 1Q. So I'm trying to understand competitively why you might be lagging in the Mid-Atlantic and other locations and maybe you don't have as many desirable new communities opening up, but your performance would be lagging relative to your peers right now. Can you help me there?

How are you doing, Ivy? Thanks for the question. Let me take a crack at part of it and then maybe Phil or others here want to also answer that. First of all, I think when you look at the whole Mid-Atlantic region, I think that we're gaining market share in Raleigh and not only holding steady, but probably gaining in Charlotte as well. So I think our performance in North Carolina is quite strong relative to the general market.

And in D.C., your comments about pricing pressures is what we have seen and our sales there have been a little slower than we would have anticipated. And I think that's reflected in the fact that our sales were essentially flat for the quarter. I'm not too sure we're lagging. I think that's just sort of the way it is. We had a number of communities in D.C. that we've hoped might open a little earlier than they in fact have, but they are -- I think the numbers somewhat speak for themselves.

Phil, I don't know if you would add anything to that.

No, we wish that absorptions were a little bit better than they are. Have been opening, as Bob said, a lot of new communities and so forth. Hopefully, things will improve as we get models opened, merchandising done and those type things, but it has been a little slower than we had hoped.

Okay. And you had not commented as other builders had on the trends in April so far. We've heard from a few other builders today, would you say that the trends in April have continued at roughly the same levels that you guys experienced for the 1Q?

Well, no, we haven't commented on April. And I guess the only thing I'd say is that it appears that traffic has dropped off a little bit in the first three weeks or so of April. Some of that, I think, was due to Easter and so forth, but beyond that we're not going to comment any further on April.

Okay, great. And then just in terms of the, I guess, strategy going forward, as you are pulling back in the Midwest and recognized with the exception of Chicago where you're investing in other markets, can you just outline for us where you see within each region maybe your star and where the biggest dog would be within the various operations? With the, I guess, longer term view maybe those dogs will continue to be dogs like Cincinnati, which I know is challenged with the airport and Chiquita leaving and some other factors. So just curious if you can break it down. Hopefully, it won't take you too long to do, Bob.

Ivy, do you define a dog as being a bad market?

Yes, sorry.

Ivy, some people love dogs, that's why I asked you that way, but --

No, I love dogs. I don't know, it's just always been the jewels versus the dogs, but --

You know what, we really like all of our markets. I don't want to be too politically correct here, but we really do like all of our markets. We were concerned perhaps more so than most about Columbus, Cincinnati and Indianapolis collectively. Over the last several years, they were among the first markets to slow down, and at one point it appeared that the job growth there might be one of the last to come back. But we've seen a noticeable uptick in our business in Indianapolis or much more bullish about Indianapolis than we were frankly a year ago.

I talked about permits being up 21% year-over-year in Columbus. We feel very good about that. And Cincinnati, I think your scorecard is pretty accurate quite candidly. I think Cincinnati is probably from a purely macro standpoint one of our weakest. But I also say this is, if you talk to most builders, I think they'll tell you Chicago is a tough market. And it's a show dog for us, so which is also known as a star.

We love the Carolinas. We're very bullish long term about D.C. as well. Tampa and Orlando, I think that surprisingly -- we've seen a surprising uptick in demand in both Tampa and Orlando. And I think that you probably know as much about Texas as anybody, and we're really just getting started there and we feel really good about our prospects there long term. So I guess that would be my rundown.

That's very helpful. Thanks, Bob.

Okay.

Congratulations.

Thanks. Appreciate it.

Alex Barron, Housing Research Center.

Yeah. Hi, guys. Thanks for taking the questions. I was tracking your community count and it seems like you guys have opened up a ton of communities, I guess, in all of your markets, but I was interested in particular in the South, which I guess is Texas and Florida. So I'm expecting that you guys are going to see pretty good orders going forward.

I guess, I'm just kind of wondering on the -- as far as SG&A, roughly like -- we should start to see some operating leverage there. So I'm just kind of wondering is it your expectation that you're going to maintain the fixed part of those costs here for the near term and also when do you expect you'll be able to get the DTA back?

Hey, Alex, you had a couple of questions there. As far as the community count, we said that we expect, hope to have about a 10% growth this year. When you break that down, we kind of see that being a continuation, Chicago continuing to grow some. As Bob said, Indianapolis also has been doing very well. We're also seeing a couple of opportunities in Cincinnati, but that community count not moving much. Columbus, we're working through some legacy position still, but growing our market share. So our Columbus count is coming down. So we don't really see the Midwest count changing a whole lot this year.

When you look at the South, I mean, you are right, we do see Texas going up a fair amount. San Antonio, which we closed on April of last year, we're growing that operation. And then Houston, we had a small partnership happen in April of this year with Triumph Homes, which adds about five communities. And also we see Tampa and Orlando, some opportunities there. So we do see the South growing community count pretty much in all of our markets.

And then when you look at the Mid-Atlantic, we've been opening a fair amount of new communities in the Carolinas and D.C. Now, we're more getting models open and starting sales and so forth. But we also still expect to see a little growth in the Mid-Atlantic. And again, that's where we get maybe another 10 or 12 net communities for the year. So that hopefully addresses your first question.

Right.

As far as SG&A, we obviously don't give any projections on that. We did get some leverage this year's first quarter compared to last year's. Hopefully we'll get more in the future, especially if Texas gets out of more of a start-up mode and gets rolling.

We were pretty pleased with our margins of 18.1%, but of course, we're working very hard every day to try to increase those. But we are very much focused on trying to get more volume, margin increase and also leverage those SG&A expenses. We talked about folks [done] a whole lot on those expense levels. And then as far as the DTA reversal, I'll let Ann Marie deal with that.

Our DTA reversal will likely come as we begin to return to profitability. It won't be for a while because you have to show a trend over frankly more than two years or three years, according to the rules. So we'll likely see a reversal of the DTA as we make money. So it will bleed in.

So you don't expect it to be like a one-time event?

I'm not sure of how the other builders are saying, it's a one-time event to be frank with you. I have the same auditors as some of them.

Yes, there's been comments obviously by Lennar and Horton, and of course their situation is different than ours. But again for us, just focusing on getting back to profitability. We'd like to think, as soon as we start getting back to consistent profitability that we would get some benefit from that and that is a very sizable number for us. Although it doesn't help our cash situation, significantly it helps our net worth and so forth. So again, that's something we'll be focused on, but it's nothing we're really counting on in the short term.

Okay. Now as far as the -- if you do start to see some substantial growth, what are your plans on the balance sheet? I mean, you guys just paid down this $40 million. And well, I think if you start to see some substantial growth, it seems like you're going to need a little bit more capital, so is your plan to raise some additional debt or just use the line of credit?

Alex, this is Kevin. We haven't changed what we have been commenting on for a couple of quarters that we believe that our current availability of capital sources is adequate to fund our business. As Phil gave, we're really -- we're 10% up right now in communities year-over-year and we expect to end the year about 10% up from the end of 2011. So I'm not sure how you define substantial growth, but we feel pretty comfortable that we have the capacity to fund our operations right now with using a combination of our bank lines and cash on hand.

Okay. Great. Thanks. I'll get back in the queue.

Thanks, Alex.

Jay McCanless, Guggenheim Securities.

Hey, good afternoon everyone.

Hi.

I wanted to ask first, did you all dip into the credit facility to pay off the 2012 notes?

No, Jay. This is Kevin. We ended the quarter with $67 million of unrestricted cash, and we did take those notes out on April 2 just because Sunday -- April 1 was a Sunday. So now we had enough cash at the time to take out the notes with cash on hand.

Okay. Great. And then with the Triumph acquisition, first, could you talk about the reasons behind it and what it adds to your footprint there and then should we be looking for any one-time items in the 2Q numbers from that?

This is Bob Schottenstein. I'll be happy to take a crack at part of that. It was a very important strategic decision for us in a number of respects. One, we were looking for a new leader for our Houston division. This has been a start-up. And the individual that we identified and believing to be the right candidate for us happened to also own a relatively small homebuilding operation, but he himself was a seasoned builder in the Houston market. He's run large operations for other builders there. And it just was an excellent fit for us and one that we think will serve us very well as we start to get a lot more traction in the Houston market.

And second part of the question was --

Jay, as far as the financial impact, it was not any significant type number. It was about five communities and backlog of 25 or so. So again, it was not any type of significant financial impact.

Okay. Okay. And then last question, and you addressed this in the prepared remarks, but just wanted to find out when we can expect the growth on it to slow down. Your selling expenses are about 27% year-over-year. Understanding that part of that is the addition of the San Antonio neighborhoods, but is that number -- the growth rate going to flex down over time or are you having to do some extra ad spend, et cetera to get the word out in those new areas?

Well, when you look at starting up operations in Houston and also growing San Antonio, it tends to take a little bit of while start making money bottom line. So we are spending time and money, new communities, getting the word out, et cetera. But, of course, if you look at our backlog, our backlog is up unit-wise 25%. Our first quarter is usually our lowest amount of deliveries and weakest profit quarter. So we obviously hope to increase deliveries and improve results as we go through the year. That's our goal.

Okay. And I think you said previously approximately 25 units, so could we [tag pro forma] another 25 units on the backlog from that Triumph acquisition?

Yes, they came in the 1st of April.

Okay, okay. Great. Thanks everyone.

Thank you.

Joel Locker, FBN Securities.

Hi, guys, how is it going?

Hi, Joel.

Just I guess on the backlog conversions, it's dropped about roughly 10% year-over-year the last two quarters. And I mean could you see a similar trajectory now that your backlog units are growing where you might get in the low-60s like you were maybe back in '09?

It was disappointing to us to only deliver 75% of our backlog. We talked about last year, in the first quarter it was 83%. If you look at the second quarter of last year, we delivered 79%, the third quarter was 70%, et cetera. We have been, if you look at the gross sales in the first quarter about a third of those sales were specs, which is the lowest it's been in a few quarters.

Right.

So that contributed somewhat to that. But we're working very hard to get more of our backlog delivered. But also, in general, we prefer like most people do to sell more to be built. The buyer tends to select more options and we tend to have ability to make more money on those options and those type of things. But nothing real big caused the deliveries to go down a little bit. But we were hoping to deliver more like 80% as opposed to 75%, but that's something we're continuing to work on.

Right. And as specs become a smaller percentage of your deliveries just because your backlog is growing in unit-wise and your specs aren't growing near as high. Do you expect that just to normalize or has your cycle times improved so much from 2009 where you can actually --

I mean our cycle times have improved and we continue to work on that. You saw from the spec numbers, our spec numbers have actually come down from where they have been and kind of where we thought they would be. But again, spec business continues to be a significant part of our business. We just try to manage that as best we can. Taking into account our cash, liquidity and everything else, that's just something we try to manage. But I would sure hope to be delivering a higher percentage of my backlog in the future than I did the first quarter of this year to answer that question.

Right. And what was your gain or loss on your $700,000 land sale?

Virtually nothing, not any profit of any significance or any loss.

So less than $100,000 or down [plus of] $100,000?

It is a very small number.

Very small. And would you think about just changing your capital structure or might affect your tax valuation allowance where you'd swap your preferred equity for some common, and just obviously lower your debt-to-cap a little bit at these attractive levels or for a common at least or the preferred, would you even be open to it?

Joel, I think we've talked about I think in the past that -- this is Kevin, that the preferred is something that we'll have to give some consideration to at some point in time.

Right.

Right now it's just not a priority for us. We certainly look at different opportunities at all times and consider what might be available. But that transaction would not be attractive to us right now.

Right. And just last question on the capitalized interest, I mean you guys probably mentioned it, but I missed it, what was it?

The amount of capitalized interest really hadn't changed much, it's about 2% to 3% of the balance sheet. It's about $18 million and it was $20 million a year ago of capitalized interest.

$18 million. Right. Thanks a lot, guys.

Thanks.

(Operator Instructions) Alex Barron, Housing Research Center.

Great, thanks for taking my question. I wanted to ask if you can comment on, some of the other builders today have been talking about pricing power and their ability to raise prices. And I'm wondering what you guys have seen, what you guys are thinking on that front? And I guess related to that, what your margins and backlog are relative to what you just delivered?

It's Bob Schottenstein, Alex. As far as pricing power, we have seen some, there's no question about it. That's going to vary from market-to-market and submarket-to-submarket within markets. But the improvement in our margins are a reflection of a number of factors. I think I mentioned in my primary comments. One, the mix from new communities, because our margins on average are several hundred basis points higher in new communities than they are in legacy communities. And we continue to get a greater preponderance of our closings from new communities.

Of course, we've also shifted our investment into what we think are better markets where we get better returns, which also contributes to improved margins. But the other thing is, is that we have seen in -- and I'm not going to say in every one of our markets, but in many of them and most of them, there are select communities where we've been able to move our prices up.

And I don't think I could give you -- of the 120 or so active communities, I couldn't give you a percentage where we've raised prices. But it's more than nominal, and it's probably -- so I don't want to comment any further, because I don't want to say anything that might be a little misleading, but clearly we've seen and this is something we wouldn't have been able to say a year or so ago, the ability to begin to raise prices.

And if you look at it as far as the price and backlog, this is the fourth consecutive quarter that our average sale price and backlog has increased and now we're at $269,000, which by and large is good news for us. As far as margins, what's in backlog and forecast, we really don't give those type of projections. But again, work very hard every day to try to improve our margins.

Right. But the increase in the backlog, I mean how much of that is [really to --] you've raised prices versus just some change in geographic mix or product mix?

A lot of it also was [for -- it's] not just product, which we spend a lot of time on, but it's also mix. I mean, if you look at the average sales price, the Midwest is $257,000, the Southern region is $240,000 and the Mid-Atlantic is $335,000. Raleigh tends to be a littler higher price point for us, as well as D.C. Also, our Florida prices have been increasing. So again, we do feel pretty good that our backlog has been increasing.

Okay, great. Thank you.

(Operator Instructions) And there are no questions at this time.

Thank you very much for joining us, look forward to talking to you next quarter.

This concludes today's M/I Homes Incorporated first quarter conference call. You may now disconnect.