M/I Homes Inc

NYSE:MHO

Earnings Call Transcript 2018-Q1

[Operator]

Good afternoon, ladies and gentlemen. My name is Leticia, and I will be your conference operator. At this time, I would like to welcome everyone to the M/I Homes first quarter conference call. [Operator Instructions]. Thank you.

I would now like to turn the call over to Phil Creek. Please go ahead, sir.

[Phillip Creek, EVP, CFO & Director]

Thank you. And thank you for joining us today. On the call is Bob Schottenstein, our CEO and President; Tom Mason, EVP; Derek Klutch, President of our mortgage company; Ann Marie Hunker, VP, Corporate Controller; and Kevin Hake, SVP. First, to address Regulation Fair Disclosure. We encourage you to ask any questions regarding issues that you consider material during this call because we are prohibited from discussing significant nonpublic items with you directly. And as to forward-looking statements, I want to remind everyone that the cautionary language about forward-looking statements contained in today's press release also applies to any comments made during this call.

Also, be advised that the company undertakes no obligation to update any forward-looking statements made during this call. Also during this call, we disclose certain non-GAAP financial measures. A presentation of the most directly comparable financial measure calculated in accordance with GAAP and a reconciliation of the differences between the non-GAAP financial measure and the GAAP measure was included in our earnings release issued earlier today that is available on our website.

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

[Robert Schottenstein, Chairman, CEO & President]

Thanks, Phil. Good afternoon, everyone, and thank you for joining our call to review our first quarter results. We are pleased to report a strong start to the year. Our first quarter results set all-time first quarter records for revenues, homes delivered and the highest number of new contracts for any quarter in our 42-year history. Our first quarter new contracts increased 20% over last year, selling 1,739 homes, with strong sales across most of our markets. And our sales absorptions per community also improved in the first quarter to a selling pace of three contracts per month compared to 2.7 contracts per month last year.

This is an indication of continued market strength and demand for housing in addition to the successful execution of our product design strategies and our continued focus on premier locations. As a result of our strong sales, our backlog sales value increased 31% compared with the end of last year's first quarter to a first quarter record of $1.1 billion. And units and backlog were up 24% to 2,744 homes. We reported net income of $18.1 million for the first quarter of 2018, equating to $0.60 per diluted share, and this represents an increase of 9% in earnings per share over last year's first quarter.

Total revenues for the quarter increased 8% to a record $438 million while the average home closing price was flat compared with a year ago, coming in at around $373,000 a house. We closed 1,122 homes in the first quarter, which was also a first quarter record for our company, and this was an 8% increase over last year. We were especially pleased to successfully close the acquisition of Detroit-based Pinnacle Homes in early March. The Detroit market represents our 16th market, and the acquisition of Pinnacle makes us a top five builder in that market right from the start. We control more than 1,000 lots in the market and we fully expect Detroit to be a meaningful contributor to our company.

The acquisition of Pinnacle further enhances our growth and strengthens our geographic footprint. Pinnacle has built a solid and well-earned reputation for quality with attractive home designs and premier locations, a very good fit for M/I Homes. And we have retained our strong operating team, led by an individual with significant years of experience building in Detroit. We're very excited about our prospects for success in the Detroit market. Getting back to our results, pretax income for the first quarter was $26.5 million. That excludes $2.6 million of acquisition-related costs in connection with the Pinnacle transaction. And that $26.5 million of pretax income from the -- for the quarter compares with $26.3 million of pretax income in the first quarter of 2017.

Our pretax earnings were flat compared with last year's first quarter, primarily due to a decline in operating gross margin from last year of about 70 basis points. However, our operating gross margin did improve by 80 basis points sequentially from 2017's fourth quarter. Excluding acquisition-related charges, the gross margin for the first quarter came in at 20.6% compared with 21.3% in the first quarter of 2017. As we've stated during the last several quarterly conference calls, we continue to believe that our margins will hover in the 20% to 21% range. During the quarter, we made progress on our overhead expense ratio, which improved 30 basis points from last year's first quarter, with total SG&A coming in at 13.2% of revenues.

We continue to be very focused on improving our pretax margins and we'll -- and hope to continue gaining operating leverage as we grow our operations. We were able to achieve our goals for opening new communities in the first quarter, opening 22 communities and adding 10 new communities in Detroit, thus ending the quarter with 205 open communities, which represents a 9% increase from the 188 communities that we had opened at the beginning of 2018. Our balance sheet and liquidity is very strong. We ended the quarter with shareholders' equity of $786 million and a very healthy homebuilding debt-to-capital ratio of 48%.

Now I'll provide a little bit more detail about our specific regional markets and our performance within them. First, the Southern region, which is comprised of our three Florida and four Texas markets. We had 541 deliveries in the Southern region during the first quarter. This represented a 29% increase over last year and 48% of company total. New contracts in the Southern region increased 35% year-over-year. The dollar value of our sales backlog in the Southern region at the end of the quarter was up 44%, and our controlled lot position in the Southern region increased by 23% compared to a year ago.

We had 91 communities in the Southern region at the end of the quarter. This represents a 5% increase from a year ago. And with respect specifically to our four Texas divisions, we had 56 open communities at the end of the quarter versus 53 a year ago. We continue to make real progress toward our goal of achieving better scale in all four Texas markets and the demand in our three Florida markets is very solid. Next, the Midwest region, which is now comprised of six markets with the March acquisition of Detroit-based Pinnacle Homes. In the Midwest, we had 411 deliveries in the quarter. This is an 8% increase over last year and represents 37% of total company deliveries.

New contracts in the Midwest were up 26% year-over-year. Our sales backlog was up 39% from the end of last year in dollar value and our controlled lot position in the Midwest increased 36% compared to a year ago. We ended the quarter with 84 active communities in the Midwest, which is an increase of 33%. Our Detroit transaction contributed 10 of those communities. Finally, the Mid-Atlantic region, which consists of our operations in Raleigh and Charlotte, North Carolina, as well as the Washington, D.C. suburbs. Raleigh and Charlotte have been strong markets for us for the past several years.

We have, however, experienced a modest falloff in sales pace and closings in both Raleigh and Charlotte, but let me emphasize the level of sales and overall market demand in each market remains healthy. We continue to work to get communities online as we sold out of a number of communities a little faster than anticipated in the two Carolina markets. The D.C. market continues to be challenging for us and we have reduced our investment and our number of active communities in that market.

In the Mid-Atlantic region, we ended the quarter with 30 active communities, which is down 12% from last year. Taking all these factors into account, new factors -- or new contracts, rather, in the Mid-Atlantic region were down 21% for the quarter compared with a year ago and sales backlog dollar value was down 11% from a year earlier. We delivered 170 homes in the Mid-Atlantic region for the quarter, a 29% decrease from a year ago, and this represents 15% of company total deliveries. Finally, in the Mid-Atlantic region, our total controlled lots at quarter's end increased 12% compared to last year.

Before turning the call over to Phil, let me simply conclude by saying this: we are off to a very good start in 2018 and M/I Homes is well positioned for another strong year. We have a very strong land position, controlling more than 30,000 lots. We plan to continue to expand our community count and to grow our aggregate market share in our existing markets while remaining intensely focused on continuing to prove our profitability.

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

[Phillip Creek, EVP, CFO & Director]

Thanks, Bob. New contracts for the first quarter increased 20% to an all-time quarterly record of 1,739 and our community count was up 11%. Our new contracts were up 24% in January, up 11% in February and up 24% in March. And as to our buyer profile, 38% of our first quarter sales were to first-time buyers compared to 37% last year. Our active communities were 205 at the end of 2018, up 11% from last year's first quarter and up 9% from year-end. The breakdown by region is 84 communities in the Midwest, 91 in the South and 30 in the Mid-Atlantic.

During the quarter, we opened 22 new communities and added 10 communities with the acquisition of Pinnacle Homes in Detroit, while closing 15, bringing the number of active communities to 205 at quarter-end. For 2018, our current estimate is that our average community count for the year should be up about 10% to 15% from the average of 183 communities in 2017. We delivered 1,122 homes in the first quarter, delivering 56% of our backlog, compared to 58% a year ago. Revenue increased 8% in the first quarter over 2017, reaching a first quarter record of $438 million. This was primarily a result of an increase in the number of homes delivered as well as record revenue from our financial services operation.

Our average closing price for the first quarter was $373,000, flat when compared to last year's first quarter. And our backlog average sale price is $398,000, up 6% from a year ago. Land gross profit was $400,000 in 2018's first quarter compared to $375,000 last year. We sell land as part of our land management strategy and as we see profit opportunities. Excluding the purchase accounting adjustments, our first quarter operating gross margin was 20.6%. This is down 70 basis points year-over-year and up 80 basis points over 2017's fourth quarter.

We continue to be faced with increasing construction, land and labor cost. In 2018's first quarter, our estimated cost increases were about 1.5%. Our first quarter SG&A expenses were 13.2% of revenue, improving 30 basis points compared to 13.5% a year ago, reflecting greater leverage from increased revenue. The dollar increase in our nonvariable selling cost are primarily due to the increase in our new community openings. Improving our operating efficiencies continue to be a major area of focus.

Our first quarter pretax results were impacted by $1.7 million of acquisition and integration costs and $900,000 of purchase accounting adjustments. Excluding this $2.6 million of acquisition-related costs, pretax income was $26.5 million compared to last year's $26.3 million. Interest expense increased $540,000 for the quarter compared to last year. Interest incurred for the quarter was $11.8 million compared to $9.1 million a year ago, and this increase is due to higher outstanding borrowings in this year's first quarter.

We have $18 million in capitalized interest on our balance sheet. This is about 1% of our total assets. Our effective tax rate was 24% in this year's first quarter compared to 36% last year. Our rate benefited from the Tax Cuts and Jobs Act. We estimate that our '18 tax rate will be approximately 26% in the remaining 3 quarters of the year. And our earnings per diluted share for the quarter increased 20% to $0.66 per share, excluding the impact of acquisition-related cost of $0.06 per diluted share.

We redeemed our outstanding convertible debt during the first quarter, which will be accretive to our diluted earnings per share in the remaining three quarters of this year due to the reduced diluted share count.

Now, Derek Klutch will address our mortgage company results.

[Derek Klutch, President & COO]

Thanks, Phil. Our mortgage and title operations' pretax income increased from $8.6 million in 2017's first quarter to $8.8 million in the same period of 2018. The higher income was the result of an increase in the number of loans originated and the volume of loans sold, along with the sale of a portion of our servicing portfolio. However, we continue to experience lower pricing margins due to competitive pressure in the mortgage market.

The loan-to-value on our first mortgages for the quarter was 84% in 2018, up from 2017 to 83%. 77% of the loans closed were conventional and 23% were FHA or VA. This compares to 79% and 21%, respectively, for 2017' same period. Our average mortgage amount increased to $302,000 in 2018's first quarter compared to $300,000 in 2017's first quarter.

Loans originated increased 8% from 725 to 781 and the volume of loans sold increased by 11%. For the quarter, the average borrower credit score on mortgages originated by M/I Financial was 740, down slightly from 743 a quarter earlier. Our mortgage operation captured about 79% of our business in the first quarter compared to 2017's 80%. At March 31, we have $78 million outstanding under the MIF Credit Agreement, which is a $125 million commitment, and we also had $25 million outstanding under a separate $35 million repo facility. Both facilities are typical 364-day mortgage warehouse lines that we extend annually.

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

[Phillip Creek, EVP, CFO & Director]

Thanks, Derek. As far as the balance sheet, we continue to manage our balance sheet carefully, focusing on investing in new communities while also managing our capital structure. Total homebuilding inventory at March 31, 2018, was $1.6 billion, an increase of $294 million above March 31, '17 levels. This increase was primarily due to higher investment in our backlog, higher community count and more finished lots. All of these include our acquisition of Pinnacle. Our unsold land investment in March 31, '18 is $706 million compared to $588 million a year ago. At March 31, we had $300 million of raw land and land under development and $406 million of finished unsold lots.

We owned 5,143 unsold finished lots with an average cost of $79,000 per lot and this average lot cost is 20% of our $398,000 backlog average sale price. Our goal is to maintain about a one-year supply of owned finished lots. The market breakdown of our $706 million of unsold land is $273 million in the Midwest, $314 million in the South and $119 million in the Mid-Atlantic.

Lots owned and controlled as of March 31, '18, totaled 30,798 lots, 42% of which were owned and 58% under contract. We own 12,898 lots, of which 40% are in the Midwest, 47% in the South and 13% in the Mid-Atlantic. A year ago, we owned 10,402 lots and controlled an additional 14,018 lots for a total of 24,420 lots. During this year's first quarter, we spent $85 million on land purchases and $42 million on land development for a total of $127 million, and about 44% of the purchased amount was raw land.

Our estimate today for '18 land purchase and development spending is $550 million to $600 million. At the end of the quarter, we had 425 completed inventory homes, about 2 per community, and 1,104 total inventory homes. And of the total inventory, 377 are in the Midwest, 557 in the Southern region and 170 in the Mid-Atlantic. At March 31, '17, we had 369 completed inventory homes and 993 total inventory homes. During the quarter, we recorded goodwill of $16.4 million as a result of our Detroit acquisition.

Also during the quarter, our $86 million of convertible notes matured. As a result of conversion elections made by holders, approximately $20 million of the notes were converted into common shares, with the remaining $66 million repaid in cash. This leaves us with no remaining convertible debt and a simplified capital structure. Our financial condition continues to be strong with $786 million in equity and homebuilding debt-to-cap ratio of 48%. And in March 31, '18, there was $162 million outstanding under our unsecured revolving credit facility.

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

[Operator]

[Operator Instructions]. Your first question comes from the line of Alan Ratner from Zelman.

[Alan Ratner, Zelman & Associates]

Congrats on the Pinnacle deal. I think it makes a lot of sense for you guys to enter Detroit. So it sounds like on the margin, you're not really expecting any big changes from your prior views there. It seems like margins are expected to remain fairly stable in that 20% to 21% range. This quarter was down, so I was curious maybe you could just give us a little bit more insight into what specifically drove that. You mentioned costs were only up 1.5%, which seems pretty modest, given some of the headlines we're seeing in lumber inflation. So it was just a situation where there was maybe some mix impact and you expect to see it kind of still hovering at that range that you've seen historically. Or was there something else driving that year-over-year decline?

[Robert Schottenstein, Chairman, CEO & President]

Alan, first of all, thanks for your comment about the acquisition. I think that as far as margins go, I think there was a little bit of mix. I think that, that comment of yours is not off; I think that's spot on. And look, we've been saying for some time that we think our margins are in the 20%, 21%, maybe a little higher than 21% at times. They got a little closer to 20% in this particular quarter, up 80 basis points over the fourth quarter. We think they'll continue to stay in that range and we're expecting to have a very good year.

[Phillip Creek, EVP, CFO & Director]

There was also, Alan, a little bit of increased seasonal, weather-type expenses in the Midwest, especially in Minneapolis. That was also 1/10 or 2/10 in the margin line. And like Bob said, there was also some mix issues.

[Alan Ratner, Zelman & Associates]

Got it. That makes sense. And then just second on the material cost inflation side, can you just remind us how you guys generally lock in your lumber costs? What is that 1.5% inflation really representative of? I mean, were those prices that were locked in middle of last year? Or is it more of a spot-type level on the inflation front? And then just talk a little bit about your ability to offset that inflation with pricing power.

[Robert Schottenstein, Chairman, CEO & President]

So far, I think we've had pretty good success in being able to offset our cost increases with pricing power. It's a little bit market to market. We try to protect our backlog with all of our pricing. We try to lock in so that the pricing is good through closing. But as any builder would tell you, when push comes to shove, the price increases get serious enough, notwithstanding the ability to lock it in, at times, you are negotiating a little bit with the supplier. But for the most part, I think we've been able to manage against that. The pricing increases that are a little bit more unpredictable right now, frankly, I think are on the land and entitlement, land development side. And there has been a lot of movement in land prices and there has been a lot of movement upward and the cost to develop on land and produce finished lots. Phil, I don't know if you want to add anything to that.

[Phillip Creek, EVP, CFO & Director]

Alan, last year, if you look at sticks, bricks, land development costs and those type of things, our estimate for last year full year was about 3.5% to 4%. So there was a little -- the 1.5% the first quarter was a little more than we experienced last year. But having said that, what we're seeing so far, I think -- leads us to believe major easing up a little bit. Every market is a little different. Obviously, at all times from lumber and everything, you obviously try to make sure your backlog and all your spec starts are protected, but costs were up a little more in the first quarter than we anticipated.

[Operator]

Your next question comes from the line of [indiscernible] from JPMorgan.

[Unidentified Analyst]

A couple of questions from our end. First, with regards to the adjusted EBITDA reconciliation and purchase price accounting, how should we think about the purchase accounting that you laid out and cost of goods sold as it relates to potential add-back to EBITDA?

[Ann Marie Hunker, CAO, VP & Corporate Controller]

It's a cash-related charge so we will -- we would not add it back for EBITDA.

[Unidentified Analyst]

Got you, okay. So it is cash-based. It would not be excluded from the EBITDA talks?

[Ann Marie Hunker, CAO, VP & Corporate Controller]

Right.

[Unidentified Analyst]

Great. That's helpful. And then on the balance sheet, your 21 is currently callable, stepping down early next year. What are your thoughts around potentially refinancing those bonds? Would you look to potentially extend those beyond your more recently issued 2025 notes? Or would you even consider a shorter-term extension?

[Robert Schottenstein, Chairman, CEO & President]

Kevin, do you want to take that?

[Kevin Hake]

Yes, Arden, this is Kevin. We're always looking at different possibilities. We don't lack the premium on the call currently, but recognize that the view of rate is rising, that there's a breakeven on a point in time where it will likely make sense for us to consider refinancing. So we'll continue to look at that, but we haven't made any decisions about the right time and we're comfortable with our overall current notes and debt availability. And so we don't feel any pressing need. We don't need additional -- we don't feel we need any additional proceeds at this point.

[Operator]

And your next question comes from the line of Jay McCanless from Wedbush.

[James McCanless, Wedbush Securities]

So the question I had -- thank you for all the details as it relates to Pinnacle. Is there any sense you all could give us for what the purchase accounting might look like for Q2 and Q3, along with any type of onetime transaction cost we should model in?

[Phillip Creek, EVP, CFO & Director]

Well, as far as the onetime transaction costs if we flow that through the first quarter as far as the acquisition costs, there was a certain amount of assets written up and that will be amortized as backlog closes, et cetera. We will be disclosing that information on a quarterly basis in the second, third and fourth quarter, just like we did in the first quarter. So you'll be able to see it broken out. As far as the impact on margins, again that will be disclosed on a quarterly basis.

[James McCanless, Wedbush Securities]

And then the second question I had, on -- disclose how many orders and backlog units Pinnacle added to the total at the end of 1Q or when the transaction closed?

[Phillip Creek, EVP, CFO & Director]

If you look at the first quarter, they added about 20 sales. A similar number of closings and the backlog was about 100.

[James McCanless, Wedbush Securities]

Okay. And then the last question I had. Can you just remind me, now that you guys are done with convertible, what the diluted and the basic share count look like at the end of the quarter and what it should look like in 2Q?

[Robert Schottenstein, Chairman, CEO & President]

Hold on a second. We're getting that information. Matt will send it to you.

[Phillip Creek, EVP, CFO & Director]

Now you're asking for some detailed information, Jay.

[Robert Schottenstein, Chairman, CEO & President]

We're digging in for this, Jay.

[James McCanless, Wedbush Securities]

Sorry, didn't mean to push on that one. While you're looking for it, one other thing I did want to ask about. Rates are moving higher. We've seen mortgage rates tick up more than three quarters now. What do you see from the field as far as customer pushback on those?

[Robert Schottenstein, Chairman, CEO & President]

I'll give you my impression and maybe Derek Klutch, who runs our mortgage operation, can add to it. We've had very -- excuse me a second, we've had very solid demand across most of our markets in the face of rising rates over the last number of weeks. And thus far, we haven't seen any kind of a significant impact. And look, I think that by, easy for me to say that by historical standards, we're still below 5%, which is really, really attractive borrowing rate. So I think that -- I think a lot of the fundamentals for housing remain quite good. I think we're -- we expect to grow community count by 10% to 15% this year, spend between $550 million and $600 million on land. A year ago, we owned and controlled 24,000 lots. Today, we own and control 30,000, which is 25% more. We are very optimistic about our business and about continued good housing conditions even in the face of rates having gone up. Derek, I don't know if you want to add anything to that.

[Derek Klutch, President & COO]

No. I would agree with Bob. We haven't really seen any pushback as far as demand. It hasn't cost us any issues with buyer qualification for mortgage loans. It's been a slow in the uptick that it really hasn't scared people off. So I would agree it's had, if any, a minimal impact.

[Robert Schottenstein, Chairman, CEO & President]

And one other thing I'd share, we didn't really talk about this in our presentation. About two years ago, we introduced our affordable line of Smart Series homes. By the end of this year, it will make up close to 10% to 15% of our total active communities. This -- it caters to a more affordable -- we build more affordable product in our Smart Series locations and the demand for that product continues to be quite robust. So we're very encouraged by that as well. And you might -- and so I -- we feel good about things.

[Phillip Creek, EVP, CFO & Director]

Now back to the share question you had. Anne Marie?

[Ann Marie Hunker, CAO, VP & Corporate Controller]

Yes. We should see at about 1.8 million less diluted shares outstanding. So about 28.80 million.

[James McCanless, Wedbush Securities]

Okay. So 1.8 million less, 28.80 million diluted shares going forward.

[Ann Marie Hunker, CAO, VP & Corporate Controller]

Yes.

[Operator]

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

[Alex Barrón, Housing Research Center]

Yes, I just wanted to see if you could elaborate a little bit more on the motivation to enter the Detroit market, what you liked about Pinnacle.

[Robert Schottenstein, Chairman, CEO & President]

A lot of things. Number one, we think that the Detroit market is a growing market with a lot of very good some solid fundamentals. It's -- Detroit was a city in trouble a decade ago. It's a city on the rise today. The competitive landscape, very favorable. Pinnacle, in particular, really high-quality builder in terms of product, customer service, quality of construction, quality in all parts of the business and very well-located communities, very profitable builder. We were very pleased to be able to conclude that acquisition. A lot of really good people. They've -- the joined our operation. Thus far, it's been a very successful not just acquisition but integration and we're really excited to be in that market. We think it's -- as I said in my initial remarks, we think it will be a solid contributor to our company.

[Alex Barrón, Housing Research Center]

Okay, great. And you said the Smart Series is now I think I heard you say 10% to 15%...

[Robert Schottenstein, Chairman, CEO & President]

By the end of this year -- no, what I said was by the end of this year, it will represent about 10% to 15% of total communities.

[Alex Barrón, Housing Research Center]

Okay. How about in terms of orders like where is that at this point and where do you see that by year-end?

[Robert Schottenstein, Chairman, CEO & President]

Don't have that information for you.

[Phillip Creek, EVP, CFO & Director]

Well, if you look at the -- actually, Dave, if you look at the first quarter, we actually had -- it was a little less than 10% of our orders the first quarter. The first quarter, we had about 12 communities. As Bob stated, at the end of the year, we're thinking we'll have in the 18% to 20% range. So again, it is growing quite a bit. So we would say, in general, it has above average community pace as far as sales. The margins have been at company average or above overall, so we've been very pleased with the Smart Series.

[Operator]

And your next question comes from the line of Lee Brading from Wells Fargo.

[Lee Brading, Wells Fargo Securities]

I guess, a couple of just follow-ups. On the M&A side, I guess Pinnacle, what are you seeing out there, and I guess, evaluating new markets and just opportunities on the land side?

[Robert Schottenstein, Chairman, CEO & President]

I'm not sure I follow the question exactly, Lee. Could you rephrase it?

[Lee Brading, Wells Fargo Securities]

Yes, two parts to it, I guess. One is the Pinnacle acquisition, and I know a lot of times when I talk to builders such as yourselves you're looking at these acquisitions really as another way to get into land, but obviously, this is a new market. So one question would be, other markets that you might be potentially looking at that you think you see opportunities out there and then I'll follow up from there.

[Robert Schottenstein, Chairman, CEO & President]

The short answer to that question is, there are other markets that we look at -- that we are looking at, although I wouldn't expect anything to happen in the very near term. Job 1 right now for us is continuing to grow market share in most of the existing markets and to get Pinnacle fully integrated. But as we move through the year here, we'll continue to look and see where we can find something that we think makes sense for us. Look, we're not desperate. We don't have to open up in any new markets. We think we can achieve our growth goals without doing anything more, but we also think that if the right opportunity presented itself, we would seize it, as we have done over the past number of years. As I said a few moments ago, today, we own and control 25% more lots than we did a year ago and we expect those to go to the system. So we are looking to grow the company based upon our existing footprint by expanding community count within the markets we're in, primarily.

[Lee Brading, Wells Fargo Securities]

Can you talk a little bit about how the opportunity in Detroit came about?

[Robert Schottenstein, Chairman, CEO & President]

Kevin really manages most of that for us. I'll let him jump on that.

[Kevin Hake]

Yes. I mean, nothing unusual as to any other acquisitions that happened amongst the homebuilders that were -- that we've taken approach of being out, being proactive, looking in markets and talking to people that may not even necessarily be for sale. At the same time, we do hear about it and keep our eyes open for opportunities through bankers and other opportunities we hear about. And Detroit acquisition came. Suddenly, we became aware of [indiscernible] and move forward. But we, first of all, checked out the box to make sure it's a market we like and it's a team and a position in that market that we think would be a good fit with us.

[Lee Brading, Wells Fargo Securities]

Got you. And switching to another market, you talked about weakness and it's not something we haven't heard from others on D.C. I guess, can you just talk about your thoughts on what's going on in the D.C. market?

[Robert Schottenstein, Chairman, CEO & President]

Well, with us, what we've really seen is just so-so conditions, not great demand, less than acceptable margins, conditions that don't entice us to throw a lot more money at that market. When you sort of put all that together, over the last several years, what has resulted has been a fairly noticeable reduction in our net investment in the D.C. market. When I talk about our decrease in unit -- in sales and closings in the Mid-Atlantic region, some of that is certainly owing to the reduction of our operation in D.C. We continue to watch that market. We continue -- we've been there a long time. We've been there since 1990. The challenge on the margin side, at least for us, and I think I've heard it from others as well, but we -- I don't -- so I don't think we're the only one. But the challenge on the margin side, we -- is what has caused us to pursue the strategy of watch and wait and reduce.

[Lee Brading, Wells Fargo Securities]

Got you. And I agree, we've heard it from others as so well. And D.C. seems to be a unique one right now to your footprint. It doesn't sound like you're having the same, I guess, noise. I don't know if that's the right word, but it's used in other markets.

[Robert Schottenstein, Chairman, CEO & President]

That's right.

[Lee Brading, Wells Fargo Securities]

And number two, we'll talk about the inflation side and the cost side, but I guess you've sort of touched on a bit. Can you talk about the, I guess, the other side of it, the ability to offset the price increases with price increases of your own? What's the -- how easy is it to pass on pricing in this environment? Or is it about just trying to maintain that to keep the cost down?

[Phillip Creek, EVP, CFO & Director]

Lee, we're always watching very closely our pricing. You always look at your cost side, but you look, more importantly, what the market is, what is the competitive landscape, what's the supply and demand. Also with us opening so many new communities, again, there's an opportunity to make sure that we get extra margin and premiums where we can. So you watch your cost, you watch the market. we've been saying for a little while, we kind of see the business as a 20% to 21% margin, maybe sometimes it'll be a little south, sometimes a little north. When you have as much volume as we do, 1/10 here, or 20 basis points here is a really, really big deal. We're very much aware of that. Our costs did go up a little more the first quarter than we had anticipated. We talked about that 1.5%-type number. Last year, it was in the 3.5% to 4% range. What we're seeing, costs are easing a little bit, but, again, especially with all these new communities opening, which we're very pleased with, we think we have good locations. We think we have really good product. We try to make sure we pay attention to lot premiums, et cetera. So again, we're very, very focused on margins but again, the cost side, lumber jumped around some, every market is a little different as far as other areas, but it's something that we try to pay a whole lot of attention to.

[Lee Brading, Wells Fargo Securities]

Got you. And then on the consumer, it didn't sound like you guys are seeing much differentiation in the consumer where I come to that conclusion is, I guess your comment on the Smart Series versus your other product in that similar kind of absorption pace. Is that a fair takeaway?

[Robert Schottenstein, Chairman, CEO & President]

We've been pleased. We got our sales pace up to 30. Our demand is really been pretty solid. I mean, traffic hasn't been all that great, but the quality of traffic has been. So we've been very pleased with our work sales. Our sales were actually a little stronger than we thought they would be. So we're very pleased about where we're positioned.

[Operator]

And there are no more questions at this time.

[Robert Schottenstein, Chairman, CEO & President]

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

[Operator]

Thank you. That concludes today's presentation. We now ask that you disconnect your lines.