M/I Homes Inc (MHO) 2013 Q4 法說會逐字稿

Good afternoon. My name is Stephanie 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. (Operator Instructions)

Thank you. I would now turn the conference over to Phil Creek. Please go ahead, sir.

Thank you and thank you for joining us today. On our call is Bob Schottenstein, our CEO and President; Tom Mason, EVP; Paul Rosen, President of our mortgage company; and Marie Hunker, VP and Corporate Controller; and Kevin Hake, Senior VP.

First, to address regulation and 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, 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 a lot, Phil. Good afternoon and thank you for joining our call to review our 2013 fourth-quarter as well as 2013 year-end results.

2013 was a very good year for M/I Homes, as we reported significant improvement in our operating results.

Total revenues for 2013 exceeded $1 billion, representing a 36% increase over 2012. Our pretax income of $41.3 million for the year was more than double our pretax income from last year. And our fourth-quarter pretax profit of slightly more than $15 million represented a very significant increase over last year's fourth quarter. Our new contracts, homes delivered, and backlog sales value each improved by more than 25% up over 2012's levels, with each reaching a five-year high.

More specifically, new contracts increased 18% for the fourth quarter and for the year we sold nearly 3,800 homes which, as I said, was a 25% increase over 2012. Our average sale price also increased, resulting in a 44% increase in the value of our sales backlog compared with the year earlier. Our average sale price in backlog at the end of the year stood at $319,000 a home.

While our results were aided by improving housing market conditions, they also reflect -- and I want to underscore this -- they also reflect our success in strategically shifting and diversifying our geographic footprint. In 2013 we gained market share in nearly every one of our markets, as we opened 65 new communities and increased our community count by 20% from a year ago.

Our financial services segment, M/I Financial, also recorded very strong performance in 2013.

And with that, I'll take a few moments to talk about our three regions, first, the Midwest Region. We had 400 deliveries in the fourth quarter; 1,237 homes closed for the year, which represents 36% of our total. Deliveries increased 26% in the Midwest Region for the fourth quarter compared to last year, while new contracts for this region were up 31% for the quarter.

Sales backlog was up 50% from the start of the year in dollar value and we increased our controlled lot position in the Midwest by over 1,000 lots, or about 22% from a year ago. We ended the quarter with 70 active communities in the Midwest, a 15% increase from December of last year. We had a particularly strong year in both Chicago and Indianapolis.

Our Southern Region is comprised of Florida and Texas and represents our fastest growing region. Our Texas expansion is going very well and is clearly beginning to contribute to our growth. We have also seen significant improvement in both of our Florida markets, Orlando and Tampa, and are achieving solid results there. We continue to grow our land position and communities in Orlando and Tampa.

We delivered 388 homes in the Southern Region for the quarter, 39% increase over last year, representing 35% of our total volume. The dollar value of our sales backlog was up 44% from a year ago, and we increased our controlled lot position in the Southern Region by more than 3,900 lots. This is an increase of nearly 80% from a year ago. We had 50 communities in the Southern Region at the end of the quarter. This is a 35% increase from last year.

I'll now talk about our Mid-Atlantic Region. In the Mid-Atlantic Region our new contracts were up 33% for the quarter compared with 2012, and our backlog value was up 35% from a year earlier. We delivered 332 homes in the Mid-Atlantic Region for the quarter, which was a 15% increase over last year and for the year delivered 1,053 homes in the Mid-Atlantic Region.

Our Washington, DC and Charlotte markets all had very strong years. We are opening new communities to continue to grow our positions in each of these three markets. We ended the quarter with 37 active communities, up about 12% from last year and increased our controlled lot position in our three Mid-Atlantic markets by 14% over a year ago.

Before turning the call over to Phil, let me just say that we begin 2014 with a very strong backlog, a solid balance sheet, and a very good land position. We control 40% more lots than we did a year ago, and we feel very good about where these lots are located.

We ended 2013 with cash balance of $143 million, shareholders' equity of $493 million, no borrowings under our $200 million credit facility, and a net debt to net capital ratio of 39%.

We remain optimistic about our business and look forward with anticipation to the spring selling season, and will continue to focus on increasing our profitability and growing our market share.

And, with that, I'll turn it over to Phil.

Thanks, Bob.

As far as financial results, our new contracts for the fourth quarter increased 18% to 793 and our traffic for the quarter was up 7%. Our fourth quarter 2012 sales were up 33%, so our 2013 improvement was off a pretty tough comparable.

Our sales were up 20% in October, up 37% in November, and down 1% in December. And as to our buyer profile, 41% of our fourth-quarter sales were the first-time buyers, the same percentage as the third quarter. And about 50% of our fourth-quarter sales were from inventory homes compared to about 45% in the prior three quarters.

Our active communities increased 20% from 131 at the end of December last year to 157 this year. And this follows our 11% increase in community count in 2012. During the quarter we opened 18 new communities, while closing 8, and for the year we opened 65 new communities and closed 39.

Our current estimate for 2014 is to increase our community count by 5% to 10% by year end, opening about 75 new communities, with a majority of the new communities opening in the second half of 2014. We project that our Southern Region, led by our growth in our Texas markets, will be adding the most new communities in 2014.

We delivered 1,120 homes in 2013's fourth quarter, delivering 70% of our backlog this quarter compared to 75% a year ago. Our average closing price for the fourth quarter was $292,000, a 7% increase over last year's $273,000. And our backlog average sale price is $319,000.

Revenue increased 34% in the fourth quarter and increased 36% for the year compared to last year, as a result of both the increase in deliveries and the increase in the average closing price. In 2013 we reached over $1 billion in revenue for the first time since 2006.

In the fourth quarter we reported pretax charges of $1.6 million for asset impairments and for the 12 months of 2013 we reported pretax charges of $5.8 million. Our 2013 charges were related to legacy land assets in our Midwest Region. We continue to work through these older assets. We are currently down to about five older Midwest communities.

Our gross margin was 19.9% for the quarter, up 90 basis points year over year. Excluding impairments our fourth-quarter GPs were 20.4% compared to 19.6% in last year's fourth quarter.

Land gross profit was $518,000 in 2013's fourth quarter and for the full year $3.8 million.

Our fourth-quarter SG&A expenses were 14.3% versus 15.2% a year ago. And for the year, our SG&A expense ratio improved 130 basis points. In dollars, our SG&A expenses increased 26% in the fourth quarter compared with last year, reflecting our volume increase and our community count growth as well as costs incurred in Austin and Dallas, where we are not yet delivering homes and generating revenues.

We are making progress on our overhead costs and continue to focus on additional efficiencies. Higher SG&A expense ratios are implicit in our startup operations of Austin and Dallas, and also in markets that are in early stages of high growth, like Houston. Even in most of our more established markets, we are experiencing significant growth. While we are gaining overhead leverage and experiencing improvement in our SG&A ratios in these markets, these ratios are not improving as rapidly as they would be if we were not experiencing significant growth. This growth leads to additional staffing expenses and new community-related expenses prior to the benefits from opening -- having closings and revenues.

Interest expense decreased slightly for the quarter. In the year interest incurred increased by $435,000. Our rate of capitalization increased due to higher land development activity when compared to a year ago.

We generated $27 million of EBITDA for the quarter and covered interest 3.4 times for the year, with $89 million of EBITDA for the year.

We have $14 million in capitalized interest on our balance sheet compared to $15 million a year ago, about 1% of our total assets.

Our earnings per diluted share for the quarter was $0.48 per share. This per-share amount reflects $1.2 million of dividends to our preferred shareholders.

Now, Paul Rosen will address our mortgage company results.

Thanks, Phil.

Our mortgage and title operations pretax income decreased from $3.5 million in the 2012 fourth quarter to $2 million in the same period of 2013. Our fourth-quarter results included an increase in loans originated from 691 to 815 and higher average loan amounts, but were offset by lower margins on loans sold, a continued shift in the product mix from FHA to conventional, and less revenue from servicing value of loans on which we retain servicing when compared to 2012 same period.

The loan to value on our first mortgages for the fourth quarter was 85% in 2013 compared to 86% in 2012's fourth quarter. We continue to see a shift towards conventional financing. 71% of the loans closed were conventional and 29% were FHA/VA. This compared to 61% and 39% for 2012 same period.

Overall, our average mortgage amount increased 3% from $246,000 in 2013's fourth quarter compared to $240,000 in 2012's fourth quarter. The average borrower credit score on mortgages originated by M/I Financial was 736 in the fourth quarter of 2013 compared to 734 in 2013's third quarter.

Our mortgage operation captured approximately 84% of our business in the fourth quarter, compared to 2012's 83%.

At December 31, 2013 we had $68 million outstanding under the MIF credit agreement, which expires March 28, 2014 and $12 million outstanding under our separate $15 million repo facility, which expires November 5, 2014. We are beginning discussions with our lenders to extend the MIF credit agreements. Both lines are typically 364-day warehouse facilities that we extend annually.

For the year ended December 31, 2013, our mortgage and title operations achieved pretax income of $14.4 million compared to $11.1 million in 2012. Our 2013 first-half results benefited from higher profit margins on our loan sales and servicing retained transactions, as supply-and-demand factors were favorable during that time. Our results in the first half of 2013 also benefited from a strong refinance market. The impact of both these positive market factors declined in the second half of 2013.

In the normal course of business we receive inquiries from investors concerning matters on mortgages they have purchased from us. We thoroughly review and respond to each inquiry and, in some situations, we engage an independent third party to review the files and information related to the origination of the mortgages in question. Our reserve as of December 31, 2013 with respect to these matters was $2.5 million compared to $2.3 million at December 31, 2012. M/I Financial has not repurchased any loans this year.

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

Thanks, Paul.

As far as the balance sheet, we continued to manage our balance sheet carefully, focusing on investing carefully in new communities while also managing our capital structure. Total homebuilding inventory at December 31, 2013 was $691 million, an increase of $134 million a year ago. The increase is primarily due to higher investment in our backlog, higher community count, and our increased land spend.

Our land investment at 12/31/13 is $339 million, a 32% increase compared to $256 million a year ago. At December 31, we had $180 million of raw land and land under development and $159 million of finished unsold lots. We owned 3,040 unsold finished lots, with an average cost of $52,000 per lot. And this average lot cost is 16% of our $319,000 backlog average sale price. The market breakdown of our $339 million of unsold land is $117 million in the Midwest, $134 million in the South, and $88 million in the Mid-Atlantic.

Lots owned and controlled as of 12/31/13 totaled 19,800 lots, 51% of which were owned and 49% under contract. Our owned and controlled lots of 19,800 is an increase of 40% a year ago. We own 10,100 lots of which 37% are in the Midwest, 43% are in the South, and 20% in the Mid-Atlantic. We believe we have a very good, solid land position. 31% of our owned controlled lots are in the Midwest; 45% of our land is in the Southern Region; and 24% is in the Mid-Atlantic.

During 2013's fourth quarter, we spent $60 million on land purchases and $39 million on land development, for a total of $99 million. And for 2013, we spent $324 million on land purchases and land development. And as to our 2013 land purchases, about 50% of the purchased amount was raw land. Our estimate today for 2014 land purchase and development spending is $400 million to $500 million.

And at the quarter we had $123 million of inventory homes, 321 homes that were completed, and 477 under construction. This translates into about 5.1 homes per community. And, of the 798 total inventory homes, 287 are in the Midwest, 288 are in the Southern Region, and 223 are in the Mid-Atlantic. At December 31, 2012 we had 649 inventory homes, with an investment of $90 million, which was about 5.0 homes per community. We believe we are positioned well with our inventory home levels.

Our financial condition continues to be strong, with $143 million of cash, $493 million in equity, and net debt to cap ratio of 39%. And the Company had no borrowings under our $200 million unsecured credit facility. The full amount, net of $12 million letters of credit, was available, so $188 million could be drawn based on our borrowing base, with remaining availability of $322 million.

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

(Operator Instructions) Michael Rehaut; JPMorgan.

First question I had was on the community count growth outlook, up 5% to 10%, so little bit of a deceleration there. I was just wondering, given the strong improvement in terms of the lot position, if that's more reflective of timing perhaps, given that you've recently acquired perhaps -- and correct me if I'm wrong -- a greater proportion of raw lots and so it has to do more with timing. And if the acceleration or the back-half-weighted nature of the community growth in 2014 would perhaps even spill over further into 2015.

Well, it's a great question. We had pretty robust community count growth last year. As I said in my comments, we're going to continue to focus on growing our business. And as Phil mentioned in his, we're looking at 5% to 10% community count growth this year, with most of it back-loaded.

I think that there has been a delay in getting certain communities opened, not just ones that we might be developing, but also developed by others. It's sort of the nature of the business with housing conditions improving and shortages of workers and so forth.

The other side of it is, is that I think that in some cases not all communities are the same. And some communities that are opening are larger. Some that we'd opened before might have been smaller and closed out earlier. So we don't think we're taking a step back. And we like where we are. We like our footprint and we like the growth goals that we have set internally for each of our now 13 divisions, 2 of which will really start closing houses for the first time this year, and that's Austin and Dallas.

Great. I appreciate that. I guess the second question, maybe to delve into the intra-quarter trends. And always appreciate that color, although obviously month to month can sometimes be misleading. But with the deceleration in December and I believe you had kind of an equally difficult growth comp in terms of year-ago November and December, I was just wondering if there was anything behind that. And, perhaps if you could also talk about pricing trends throughout the quarter and if incentives changed at all on an overall basis.

Mike, as far as the sales pace, if you actually look at our last five years, October tends to be the best month of the quarter, November tends to be second, and December tends to be the worst. If you look at our comparables of 2012, we actually had a pretty strong December last year. And I talked about our fourth quarter last year being up 33%. So we were looking at pretty tough comparables.

Having said that, which is the normal seasonality, December was the weaker of the four months. We sold 292 in October, 276 in November, 225 in December. So we still had a pretty decent December. I think there was just, you know, some seasonality and last year was just really strong.

I appreciate that, Phil. And just in terms of pricing trends throughout the quarter, and were incentives, when you characterize them as overall stable or perhaps ticking up a little bit or ticking down?

We ended up with average sale price in backlog being up about 9% December of 2013 to December of 2012. If you look at the average sale price in backlog by quarter, at the end of the first quarter we were $290,000. At the end of second quarter of last year we were at $293,000. Then we went to $304,000; then we went to $319,000. You always get into some product and mix. For example, we have opened a couple of subdivisions in particular at a higher price points. There's always some mix issues.

From a pricing standpoint I would say the cost side has not been as erratic as it has been, although there's still certain issues, depending on the market. Certain markets -- in Texas, for instance, in certain markets our cycle times have still moved up a little bit. Bob mentioned it can be a little hard in certain places to find really good subs and suppliers. But I would say overall our incentives definitely did not go up in the fourth quarter.

I'll just add a slight, just a slight bit more to that. Broadly speaking, we think that demand for housing remains good and that, as I said, we look forward with optimism to the spring selling season, which is probably starting as we speak. Obviously, there's some challenges currently in a number of the markets around the country with just incredibly cold and difficult weather. But that all said, we don't think that it's -- if I can use the term -- chilled demand in any way, if you look at things with more of a longer arc.

I do think that there's room to continue to push prices and enhance margins. And that's something that we manage week to week and month to month on a subdivision and market-by-market basis.

Great. I appreciate it. Thanks very much. Best of luck in 2014.

Ivy Zelman; Zelman & Associates.

When you think about the land that you acquired in terms of incremental lots that you talked about land spend and a lot of that being raw ground, would you give us a sense of when you're underwriting and purchasing those lots, what type of gross margins you're underwriting to? Is it in line with (multiple speakers) --

Bob Schottenstein: We've talked about this before at some length. And basically, all of our underwriting is done based on conditions as they now exist, unless there's some very compelling reason to believe that you shouldn't do it that way. So in virtually every instance when we look at deals, before we commit to them we look at current conditions, current pricing, current costs, and we don't assume that things are going to get better or worse unless there's something right out in front of us that's telling us they will.

And the other thing is that the minimum threshold on every deal is a fully loaded 20% internal rate of return. And without getting into too much of the specifics on raw deals, where there's an implicitly greater amount of risk usually we try to get a higher than 20%, because of the capital outlay.

Can you talk about --

I don't know if you want to anything to that, Phil? Okay.

I was just hoping, Bob, that you can give us more of a sense on, instead of internal rate of return and think about more on the gross margin. Given what you're reporting gross margins, you're definitely historically in a range, but you're at the lower end of your peer group. And recognizing the concern in the markets that have been brought up by many analysts, is that margins are going to contract as builders are spending more money on land, labor and materials. So, can you give us your confidence in what you're underwriting that your trajectory of gross margin will be upward? And do you feel confident that the land you're buying will give you the opportunity to expand margin?

So, if you don't want to put a number around it, maybe directionally you can talk about it.

No, I'm not going to put a number, but I'll say a couple of things. In terms of our new communities, and there have been quite a few of them over the last couple of years, we feel very good about their performance. We feel very good about the margins they're hitting. Our margins are improving and as I had mentioned in response to the previous question, we think that they can continue to improve.

One thing to keep in mind is that, although it's much less of an issue than it once was, we entered into this recovery with most of our legacy land in markets that have gotten better, but maybe [they're not in] the Midwest -- but that haven't gotten maybe as better as some of the other areas of the country that have improved at a much more rapid and pace. When you look at our operations outside the Midwest, and even in our newest Midwest market, Chicago, we think our margins fare very favorably with the other builders, if not better.

Okay. Well, that's very helpful. And let me ask you another question separately. There has been a lot of concern that's been brought up with the New Millennium buyer, that they're not going to be able to get the credit access and that they don't have the down payment and they don't have the -- or they have too much student loan debt. And you mentioned you're still doing 40%, I think you said in terms of the quarter, how many sold that were entry level. I think the one thing that would be interesting, talking to some other Midwest builders, that today is it still the mid-20s buyer who's married, maybe with a family they're starting? Can you give us some profile and maybe dispel some of the concerns that there's just no entry-level buyers in the market? Or are they buying later in life and spending a lot more on a home than you've seen historically in your tenure as builder?

Let me say one thing first, just because I want to say this, and then I'll let Phil or Paul Rosen answer the question. Keep in mind that 65% of our business, and it's an increasing percentage, is now outside the Midwest. And that's a radical change from just a few years ago. And it's not that -- I mean, that's just the fact. So, Phil, if you want to (multiple speakers) --

Well, thank you for that comment. As always, when we participate in the entry-level buyers, it tends to be more in the upper part of those entry-level buyers. We've never been a $150,000, $175,000 average sale price, looking at certain credit-constrained type buyers. You can see from the backlog breakdown in the Midwest, our average sale price in backlog is over $300,000. So when you start looking at the credit profile of those people, it's not the typical people buying those lower-priced entry level houses.

I'll let Paul talk a second about as far as what we're seeing as far as any credit issues or whatever.

But, Phil, that buyer is a first-time homebuyer. They're just spending more and they're at the affluent, more higher-end consumer that can -- but it's still their first home, correct? And that's always been the case for you, is that what you're saying, so no real change?

You know, Ivy, you have to really look at it as what section of the market you're playing in. I mean, if you're in Mason, Ohio outside of Cincinnati as opposed to on another side of Cincinnati, again, it depends on that submarket you're after, what that buyer profile really is.

So I would just add that the main issue we face with our first-time homebuyer is the ability to accumulate the down payment. That's more of an issue than a credit or an income issue to us. And in those cases, we still offer the FHA program, which is 3.5% down. But also very popular right now are conventional programs with 5% down that do allow 100% gift. So you can get a gift from a family member. So we are not struggling with our first-time homebuyers being able to get them into a home.

And the only other thing I'll say is I think if one of the points is that a lot less of the so-called Millennials are buying and most of them are renting, I happen to agree with that. There's no -- I think that's pretty clear in most markets. It's one of the reasons the apartment business is so robust.

That said, we grew our sales 25% last year and we're confident that we can achieve our growth goals this year with the complement of communities and buyer profile that are attracted to our homes.

That's very helpful. Let me just move on to one last question on SG&A. You spent quite a bit on the 65 communities that you opened this year -- or in 2013, sorry -- and are continuing to see the costs associated with Austin and Dallas where you are not yet delivering homes. So when we're thinking about your SG&A level, with community count growing at a slower pace in 2014, and you're starting to see the contribution from your newer communities and those newer markets that will be hitting the P&L, do you anticipate some substantial leverage on SG&A going forward?

You know, Ivy, we don't make specific projections like that. I mean, if you look at 2012, we were 15.6; 2013 we were 14.3. Pretty significant. When you look at the fourth quarter, it was almost 100 basis points better. Expenses went up quite a bit less than revenue did. We will be delivering our first homes in Austin starting in the fourth quarter. Also, if you look at --

Austin in the first quarter.

Sorry; Austin in the first quarter. Houston and San Antonio are getting quite a bit more scaled. So, again, as Bob said, we continue to have significant growth goals. We are focused on improving our returns and our profitability. But as far as any type of specific projections, we don't make those type of numbers.

Okay, guys, great. Thank you. Best wishes for 2014. Thank you.

Joel Locker; FBN Securities.

Just to follow up on the G&A topic, I know it went up around $8.8 million sequentially. And just maybe if you had a breakdown of what was maybe year-end stock comp versus just increased G&A or headcount or whatnot, just to kind of get a better feel for what's repeatable or not.

Joel, this is Phil. Our headcount went up about 25%. And, again, when you look at our revenue growth and our unit growth, it was in line with that. We did have higher incentives due to our operating income going from $14 million to $47 million. So we did have some higher incentive payments, obviously. But we don't break out any of those type numbers.

Right. And if you're looking at your financial service income, everybody's gotten squeezed on that lately, all the builders. But you went from about 1.5% of homebuilding revenues, the income from financial services in, I think, 2012 and 2013 versus the fourth quarter was 0.7% or something along those lines. Do you see that as a new run rate? I know it bumps from quarter to quarter, but just if you look at 2014, is that a better way to model it?

Yes, I think -- again, I mean, the first half especially were some unusual market conditions and Paul and his team did a great job of taking advantage of that. When you got to the third and fourth quarter, even though volume was up on the origination side, profitability was down. As far as is the second half and the fourth quarter a more applicable run rate, the answer is yes.

All right. And just on your orders -- I'll get back in queue after this -- your orders in your Southern Region, it looked like your absorptions went from about 7.5 a year ago to 5.1 this year. Was there any reason for the decline in absorptions year over year in the Southern Region versus you had stronger orders in the Midwest and Mid-Atlantic?

Yes, Joel, what that really was -- our Tampa and Orlando business has been very strong. We happened in the fourth quarter a year ago to have a couple of really strong communities in our Florida operations. And even though our sales were still strong this year, they just weren't quite as good. Just had a couple of really unusual communities in that fourth quarter a year ago in Florida.

Right. All right. I'll jump back in the queue. Thanks a lot.

(Operator Instructions) Alex Barron; Housing Research.

I wanted to ask you a little bit about your financing side. Are you seeing any kind of -- maybe it's too early with the changes in the rules this year. But are you seeing any kind of shift where people are no longer favoring FHA loans and trying to get conventional instead because they don't want to keep the PMI forever?

Well, the answer is yes. For the past two years we've been reporting that we've seen our volume of conventional increasing and our FHA decreasing. But we see that as starting to level off right now. Unless we see some changes on the premium structure, we think we're pretty much at a normal run rate.

What about the impact of this qualified mortgage and also any thoughts on whether Obamacare is going to have a negative impact on the number of people who can afford a home?

Let's see. On the qualified --

[Leave it] at the qualified mortgage question.

Yes. On qualified mortgage, it's a little soon to tell. We actually had run our entire previous year's loan production against the QM rules and only found about a 2% or 3% impact as we look back and we've been applying those rules. So going forward, we don't really see a significant issue in our pipeline. We think that we can respond to those regulations and still originate loans for our buyers.

Okay, great. Any comments -- not sure if I missed it -- any comments so far on the month of January and your outlook for the spring selling season?

Well, you didn't miss it. We didn't comment on January and we won't. As far as the spring selling season, what we said is that we look forward to it with anticipation and we're optimistic about this year.

Okay. And last, can you quantify how much of the SG&A this quarter was attributable to the opening of Dallas and Austin?

No. We don't break that [part] out, Alex.

Okay. Thanks.

Joel Locker; FBN Securities.

Just going back to the community count, I know you had given guidance about 25%. It came about 7% short and you mentioned there was some delays in community count. But if you look at those that maybe should have been opened by now or whatnot, would you have kind of guided towards flat to up low-single digits if you had opened those, or got those opened in the fourth quarter?

Well, Joel, again, the [estimate] was we would be increase by about 25% and we ended up at 20%. It was a combination. We did sell [true] a few more sooner than we thought. Also, there were a few for different reasons didn't get open. It is a little harder to predict. Right now we're buying about 50% raw land, so there's land development involved, et cetera. But, again, we still feel really good about the 20% growth, which was on top of double-digit growth the year before. And, again, hoping to do 5% to 10% this year, open about 75 communities this year, so still a significant amount of growth.

Right. And just going to your preferred equity, that's a pretty high interest rate, especially when you consider it's post tax. I was wondering if you were thinking about maybe taking more of that out, or maybe all of it, with credit facility if you didn't want to use your cash and just doing an interest rate arbitrage.

Joel, this is Kevin. We don't have any imminent plans right now in any terms of capital markets transactions. We made some pretty good comments when we took out half of the preferred last year. There's arguments why it's been helpful for us. We view it as equity. So you can make a counter argument that it's fairly affordable equity. We hope in the long term at some point in time that we will have better sources of capital than that preferred, but for the time being we don't have any plans.

Right. And just the last question on overall kind of gross margins, where if you look back to 2002 where you had like a kind of a 23% homebuilding gross margin versus I think you're at 20.2% currently. Do you think to get back to that level, is it just a different model now, where you get more Texas which is generally a lower gross margin, kind of high inventory-turn area that might hinder you from getting back up to that 23% gross margin?

You know, Joel, it's hard to predict. We're continuing to work hard every day to move margins up and also get SG&A leverage. If you look at the last year or so, moving margins up 75, 80, 100 basis points, we feel pretty good about that. Plus our average sale price is back over $300,000. So, again, we're just pushing everywhere we can to move those margins up. I mean, it's hard to project where they're going to land down the road.

Right. All right. Thanks a lot, guys.

(Operator Instructions) At this time there are no additional questions in the queue.

Thank you very much for joining us.

Thank you. This concludes today's conference. You may now disconnect.