M/I Homes Inc

NYSE:MHO

Earnings Call Transcript 2021-Q1

[Operator]

Good day, and welcome to the M/I Homes First Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Phil Creek. Please go ahead.

[Phillip Creek]

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, 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.

I'll now turn the call over to Bob.

[Robert Schottenstein, CEO and President]

Thanks, Phil. Good afternoon, everyone, and thank you for joining our call to review our first quarter results. We had an outstanding first quarter, perhaps the best quarter in company history. Setting records on many fronts, including new contracts, deliveries, revenues, and pre-tax income. Housing conditions in all of our markets are very strong.

The robust demand for new housing is being driven by a number of factors including low mortgage rates, historically low inventory levels, a rapidly growing number of millennials joining the ranks of home ownership, and the shift in buyer preference away from renting in favor of single-family homes.

In addition, the quality of buyers is in as good a shape as we've ever seen. Our average buyer is putting more than 15% down and has a credit score in excess of 740. Taken together, all of these factors have created an excellent environment for new home sales that has contributed to our record setting performance. We are proud of our results as we continue to gain market share and improve our profitability throughout every one of our 15 markets.

During the quarter we sold an all-time quarterly record of 3,109 homes, 49% better than a year ago. Our absorption pace per community improved significantly to 5.3 sales per community compared to 3.1 sales per community a year ago. And we continue to experience very strong results with our Smart Series, which represents our most affordably priced line of homes. Smart Series sales comprised nearly 35% of total companywide sales during the quarter compared to 30% a year ago and just 16% in 2019.

We are selling our Smart Series product in all 15 of our divisions and in roughly one-third of our communities. As we've shared before on average our Smart Series communities are larger with more lots and our Smart Series homes produce better monthly sales pace, higher gross margins, faster cycle time, and overall better returns.

Homes delivered during the quarter increased 35% and were a first quarter record. Revenues increased 43% and also represented a first quarter record. Gross margins improved by 420 basis points to 24.4% and our overhead expense ratio improved by 120 basis points. As a result, our pre-tax income was an all-time quarterly record of $110 million, 167% better than a year ago with a pre-tax income percentage of 13.3% compared to 7.2% last year. These strong returns resulted in a 25% return on equity improving from the 22% full year return on equity we had in 2020.

Our first quarter results continued our trend of strong growth in both revenues and earnings. Specifically, since 2013 our revenues have grown at a compounded annual rate of 19% and our pre-tax income has grown at an even more impressive annual rate of 43%. Companywide, our backlog sales value at the end of the quarter was a record $2.4 billion, 82% better the last year. And our units in backlog increased by 68% to an all-time record 5,479 homes, with an average price in backlog of $433,000, nearly 10% higher than the average price in backlog last year at this time.

As I indicated earlier, all 15 of our homebuilding divisions contributed significantly to our first quarter performance. And as you'll soon hear, our financial services, mortgage and title operations also had a record quarter, highlighted by strong income and excellent mortgage capture rate and very solid across the board execution.

Now, I will provide a few brief comments on our markets. We divide our 15 markets into two regions. The Northern region consists of six of our markets, namely Columbus, Cincinnati, Indianapolis, Chicago, Minneapolis and Detroit. While the Southern region consists of the remaining nine markets, Charlotte and Raleigh, Orlando, Tampa and Sarasota, and Houston, Dallas, Austin and San Antonio.

New contracts in the Southern region increased 46% during the quarter. In the Northern region, new contracts increased 53% during the quarter. Our deliveries increased 34% in the Southern region during the quarter to 1,218 deliveries or 60% of the total. The Northern region contributed the balance 801 deliveries, an increase of 36% over last year.

Our owned and controlled lot position in the Southern region increased by 35% compared to last year and increased by 8% in the Northern region compared to last year. While we are selling through communities somewhat faster than expected, we are very well positioned to handle the current level of demand. 35% of our owned and controlled lots are in our Northern region, while the balance roughly 65% are located in the Southern region.

We have a strong land position. Companywide we own approximately 16,800 lots, which is roughly -- slightly less than a two-year supply. On top of that, we control via option contracts an additional 2500 lots. So, in total, our owned and controlled lots approximate 42,000 single-family lots, which is just under a five-year supply.

Importantly and worth noting, 60% of those lots of controlled under option contracts, which gives M/I Homes significant flexibility to react to changes in demand or individual or unexpected market conditions. We had 100 communities in the Southern region at the end of the quarter, which is down from 125 a year ago. In the Northern region, we had 87 communities at the end of the quarter, which is down 11% from the 98 we had last year at this time.

Clearly, this decline in community count is a result of our accelerated sales pace, but it's also important to recognize that over one-third of our communities are now are offering our Smart Series homes and that these communities often have more lots in total, but they also produce a greater sales pace. We are managing our sales pace as well as our pricing in our communities to take advantage of the strong demand and to assure delivery of a high return on our investment.

Before I turn the call over to Phil, let me just make a few final comments. Our financial condition is very strong with $1.4 billion of equity at the end of the quarter and the book value of $46.37 per share. We ended the first quarter with a cash balance of $293 million and zero borrowings under our $500 million unsecured revolving credit facility. This resulted in a 32% debt to cap ratio, down from 39% a year ago and a net debt to cap ratio of 21%. We are very excited about our business. Our financial condition has never been better. We have important operating momentum throughout the company. And the quality of our product along with the quality of our communities and our land position positions us for continued growth, continued gains in market share and strong results. We fully expect to have an outstanding year in 2021.

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

[Phillip Creek]

Thanks, Bob. As far as our financial results, new contracts for the first quarter increased 49% to 3,109, an all-time quarterly record compared to last year's first quarter 2,089. Our new contracts were up 68% in January, up 21% in February and up 64% in March and our sales pace was 5.3 for the first quarter compared to last year's 3.1. And our cancellation rate for the first quarter was 7%. And as Bob stated, we continue to manage sales pace and returns in our communities closely. As to our buyer profile, about 56% of our first quarter sales were to first time buyers compared to 53% in the fourth quarter of last year.

In addition, 43% of our first quarter sales were inventory homes, the same as 2020's fourth quarter. Our community count was 187 at the end of the first quarter compared to 223 at the end of 2020's first quarter. The breakdown by region is 87 in the Northern region and 100 in the Southern region.

During the quarter, we opened 21 new communities, while closing 36. And last year's first quarter, we opened 17 new communities. We delivered a first quarter record of 2,019 homes, delivering 46% of our backlog compared to 56% a year ago. Production cycle times are being lengthened by supply issues.

Revenue increased 43% in the first quarter, reaching the first quarter record of $829 million and our average closing price for the first quarter was $395,000, a 6% increase when compared to last year's first quarter average closing price of $374,000 and our backlog average sale price is $433,000, up from $399,000 a year ago and our backlog average sales price of our Smart Series is $335,000. Our first quarter gross margin was 24.4%, up 420 basis points year-over-year. Our construction and land development costs continue to increase with our biggest impact from lumber.

Our first quarter SG&A expenses were 11% of revenue, improving a 120 basis points compared to 12.2% a year ago, reflecting greater operating leverage. Interest expense decreased $3.5 million for the quarter compared to the same period last year and interest incurred for the quarter was $10.2 million compared to $11.9 million a year ago and the decrease is due to lower outstanding borrowings in this year's first quarter as well as a lower weighted average borrowing rate. We are pleased with our improved returns for the first quarter. Our pre-tax income was 13.3% versus 7.2% a year ago and our return on equity was 25% versus 15% a year ago.

During the quarter, we generated $125 million of EBITDA compared to $59 million in last year's first quarter and we generated $75 million of positive cash flow from operations in the first quarter compared to using $24 million a year ago.

We have $22 million in capitalized interest on our balance sheet, about 1% of our total assets and our effective tax rate was 23% in this year's first quarter, the same as last year's first quarter. And we estimate our annual effective rate this year to be around 24%. And our earnings per diluted share for the quarter increased to $2.85 per share from $1.09 per share last year.

Now, Derek Klutch will address our mortgage company results.

[Derek Klutch, President, Mortgage Company]

Thanks, Phil. Our mortgage and title operations achieved record first quarter results in pre-tax income, revenue and number of loans originated. Revenue was up 120% to $29.6 million due to a higher volume of loans closed and sold, along with higher pricing margins than we experienced last year.

For the quarter, pre-tax income was $19.7 million, which was up 250% over 2020's first quarter. The loan to value on our first mortgages for the quarter was 84%, same as 2020's first quarter. 78% of the loans closed in the quarter were conventional and 22% FHA or VA. This compared to 72% and 28%, respectively, for 2020's first quarter.

Our average mortgage amount increased to $328,000 compared to $306,000 last year. Loans originated increased to a first quarter record of 1,575 loans, 39% more than last year. And the volume of loans sold increased by 50%. Our borrower profile remains solid with an average down payment of over 15% and an average credit score on mortgages originated by M/I Financial of 746, up from 745 last quarter. Our mortgage operation captured over 84% of our business in the first quarter, which was in line with 85% last year.

We maintain two separate mortgage warehouse facilities with combined availability of $215 million that provide us with funding for our mortgage originations prior to the sale to investors. At March 31, we had a total of $176 million outstanding under these facilities which expire in May and October of this year. Both facilities are typical 364-day mortgage warehouse lines that we extend annually. We have requested an extension of the Warehouse agreement that expires in May and we expect the banks to approve the extension shortly with closing anticipated prior to expiration.

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

[Phillip Creek]

Thanks, Derek. As far as the balance sheet, our total homebuilding inventory at March, 31 was $2 billion, an increase of $138 million from March 31, '20. Our unsold land investment at March 31 of this year is $742 million compared to $809 million a year ago. At March 31, we had $426 million of raw land and land under development and $316 million of finished unsold lots. We owned 4,227 unsold finished lots with an average cost of $75,000 per lot and this average lot cost is 17% of our $433,000 backlog average sale price. Our goal is to own a two to three-year supply of land.

During this year's first quarter, we spent $92 million on land purchases and $71 million on land development for a total of $163 million, which was up from $138 million in last year's first quarter. And in the first quarter of this year, we purchased 2,500 lots of which 75% were raw. In last year's first quarter, we purchased 1,800 lots of which 70% were raw. In general, most of our Smart Series communities are raw land deals and have above average company pace and margin.

We have a strong land position at March 31, controlling 42,000 lots, up 24% from a year ago, and of the lots controlled, 40% are owned about a five-year supply. And at the end of the quarter, we had 98 completed inventory homes and 708 total inventory homes and of the total inventory 423 homes are in the Northern region and 285 are in the Southern region. At March 31 last year, we had 556 completed inventory homes and 1,322 total inventory homes. This completes our presentation.

We'll now open the call for any questions or comments.

[Operator]

[Operator Instructions] Our first question comes from Jay McCanless with Wedbush. Please go ahead.

[Jay McCanless, Wedbush]

Hey, good afternoon. Congratulations on a really great quarter.

[Robert Schottenstein, CEO and President]

Good afternoon, Jay.

[Jay McCanless, Wedbush]

Just got two or three questions for you. Yeah, absolutely. And understanding that the February weather probably had an effect on everybody, but can you talk about the sharp increase in order growth from February to March and frame it in the light of metering sales or trying to slow sales so that construction can keep up, because and not be a smart aleck about it, but when we hear this from the builders that they're trying to slow things down and then they put up such really great sales numbers. When is that going to show up in the order growth or when is that going to show up in the closing growth numbers or in the closing numbers over the next couple of quarters?

[Phillip Creek]

Jay, as far as the orders, we were very pleased with a 3,100 for the quarter and each month was about 1,000. So just from a number standpoint, it really was pretty consistent. From a closing standpoint, we were very pleased with our closing number. We probably had 25 to 50 closings delayed from Texas due to the crazy whether they had.

As Bob said, we feel really pretty good about the way we're managing sales and also the construction side of the business and so forth. We have a very, very strong backlog. Of course, the backlog conversion rate is going down, because we don't have this many specs in the pipeline to close quickly plus it just takes a little more time to manage a bigger backlog. But having said that, we are looking for a strong second quarter in closings.

[Robert Schottenstein, CEO and President]

Jay, I don't have much to add other than I think the demand was exceptionally strong and has been for more than probably six months, seven months, almost be going back to last May actually. I didn't really -- I don't take there was any discernible difference in demand from January to February to March other than maybe the the difficult period in Texas for about a week or two with the electric problems and the bad weather. But I -- we're doing the best we can to manage and control doing so because we want to make sure that we can deliver homes in timely fashion, protect our costs, protect our margins and satisfy customers.

[Jay McCanless, Wedbush]

Got it. Yeah, I'm just trying to get a sense of how the pace is going to go this year from a unit volume perspective and actually that Phil, you touched on closings per month and that's what I was going to ask next, because in 2019, you guys did a 2.4 on average closings per month, last year it was 3.2 and now this first quarter, you closed almost 3.5 homes per month on average in your communities. Is that the kind of pace we should expect for the rest of the year or is that going to have to slow down now that you sold through most of the spec inventory you have?

[Robert Schottenstein, CEO and President]

I think some of that increase is due to Smart Series homes, the cycle time for which is several weeks less than non-Smart Series. And two years ago, keep in mind, it was about 15% of our business may be a little more. Today it's 35% of our business.

[Phillip Creek]

And also, Jay, look at closings in the last three quarters, we've closed 2,000-plus homes third quarter of '20, fourth of '20 and the first quarter of this year, we've been at the run rate of 2,000-plus. So as Bob says, we're continuing to do all we can to deliver as many quality homes as we can and we should have a strong backlog to do that.

[Jay McCanless, Wedbush]

Yeah, I guess. And then the next question I have is, when we think about the gross margin, it sounds like you guys closed out a significant amount of communities this quarter was this some of the older Smart Series communities in Texas or in some of your other markets that drove the margin this higher or was it price mix. What drove the gross margin outperformance and how likely is that to continue?

[Robert Schottenstein, CEO and President]

Well, we don't give margin guidance, but my answer to that would be demand is driving the margins more than mix or land that we bought a long time ago. We haven't had mothballed ground for, I don't know, we've ever had and certainly not for a decade. I can't remember if we ever had frankly.

But my point is, I think that the 24-plus percent margins are being fueled by the economy by the market that we're operating in. And based on what we know today, unless things were to slow down, rates were to rise noticeably or commodity prices were to just go really crazy unless something really unexpected were to occur, we would expect margins to continue at this pace for the near-term, but we don't have any guidance on that.

[Jay McCanless, Wedbush]

Okay.

[Robert Schottenstein, CEO and President]

But in terms of expectations, that's what we'd expect.

[Jay McCanless, Wedbush]

Understood. And then the last question I have, on the last conference call you all sounded reasonably confident that you could maybe start to show some year-over-year community growth by year-end '21. How are you feeling about that now and any ideas or answers where you think we might go in '22 in terms of the community count?

[Robert Schottenstein, CEO and President]

I'll say one thing and then let Phil. We don't have guidance on that, which I think probably frustrates people. But the fact of the matter is we expect to continue growing. We expect to continue producing strong returns. We expect to continue to gain market share in our markets. And that is going to be a combination of continued rollout of Smart Series, but also opening a lot of new communities a we move on down the road.

[Phillip Creek]

Jay last year, we opened 69 new stores and as we said on the last call, we intend to open more stores this year than last year and we talked about the first quarter of this year, we opened 21 versus 17 of last year. We are selling out of stores a little faster than we thought. So I think that having community count growth this year is going to be very challenging. But having said that, with the Smart Series continuing to be a bigger part of our business with stronger pace and stronger margins, but our non-Smart Series also has performed better.

I mean one of the big things we're benefiting from Bob talked about is just the increased penetration of the increased scale. If you look at us in the last couple of years, the significant growth we've had in our Texas markets, Sarasota has been very strong for us. Our Detroit acquisition is having improved results.

Our Carolina markets where we were a little bit down in communities are now kind of back. So we've had some strong performance across the markets and that improving in scale and gaining in market shares has really helped our results and we're really focused on continued to improve income and our returns.

[Jay McCanless, Wedbush]

Got it. Well, congrats again. And thanks for taking my questions.

[Robert Schottenstein, CEO and President]

Thanks.

[Phillip Creek]

Thanks.

[Operator]

Our next question comes from Alan Ratner with Zelman and Associates. Please go ahead.

[Alan Ratner, Zelman and Associates]

Hey, guys. Good afternoon and congrats on the great results. I've got a few questions as well. Phil, maybe I'll kick off with the last comment you made about scale. I think as you guys know, we think that scale is obviously a very important driver of margins and performance across the Group, and I know you guys have been talking about the focus there for a long time. And Bob, you kind of made the comment that 24% gross margins is demand driven and certainly I think that that was the biggest catalyst.

But I'm curious if you think that historically you've talked about this being a 20%, 21%% gross margin business. I'm curious if you assume some normalization in pricing power at some point in the future, do you feel like you guys have done enough in the business in terms of taking market share, gaining scale where structurally perhaps your margins could be a little bit higher than that 20% to 21% range going forward once we kind of get through this crazy demand period that we're in right now, however, long it lasts for?

[Robert Schottenstein, CEO and President]

Well, he addressed to you, Phil. So you go first and then I'll.

[Phillip Creek]

Obviously, we're focused very much on improving margins in all of our markets. With more volume, hopefully, we'll be able to get the better margins, because when you have fewer communities, you tend to be kind of on a treadmill or maybe you kind of force sales a little bit to get the volume you need. So we do think that our scale will help us improve margins.

We always try to stress and we think our execution with our 15 area presence has been very, very strong. Make sure we're market pricing, make sure we open communities right. There is no reason to get too far out ahead of our cost. So execution really, really matters. So, when you're dealing with $3 billion or $4 billion of revenue through the quarter means a whole lot. So we're sure hope and that we're going to be able to improve our margins and do better than the competition.

[Robert Schottenstein, CEO and President]

What I would say is, I agree with you, Alan in that. Look, a year or two ago, we were a 6,000 to 7,000 run rate builder. Today we're north of 10,000 run rate and we ought to get better pricing on certain nationally purchased items if our business is 40% larger.

We shouldn't be paying the same thing for buying 40% more of the same item. We have a great national purchasing program. I think it's outstanding. But if it stands to reason, if you're buying more you ought to have a little bit more leverage maybe to get a little bit better pricing on certain commodities and that's something we're very focused on.

The other issue is the below the gross margin line benefits of that scale, which I think are the ones that are most important, we brought 13-plus percent of the bottom line this quarter. Last year at this time, we felt pretty good about ourselves. We've brought 7% of the bottom line.

Now, part of that is 400 basis points of it's in gross margin. But the other 250 to 300 basis points is below the line leverage. So, right now, we're very excited about the opportunities that scale gives us. We've known and believed and hope that it would be coming and it is. And as we look out over the next several years while we don't know if housing is going to stay as strong as it is now.

Generally, speaking, we're very optimistic about the industry. We believe there has been a shortage of homes produced for many years. I don't know if it's 3.5 million less than we needed or 5 million or 1 million. But I also know that the group that has the greatest potential to impact our industry, which I think is the millennials are really beginning to increase their home ownership rate by halves in 1%, 1.5% over 12-month period and that's a lot of home purchasers.

And while right now, a lot be more new than used, because you just so if few used homes for sale. The fact is, I think housing has a lot of room to run and we're very well positioned and whether our gross margin stay at 24% or maybe and go up a little higher here in the near term, maybe they settle back, maybe they will settle back closer to 22% and 20% to 21% that remains to be seen, but I think we have a chance as we grow relative to our peers to continue to improve our returns.

[Alan Ratner, Zelman and Associates]

Great. And I appreciate both of your viewpoints there and it will be interesting that to see. Second question I'd love to dig in a little bit on the production side of things. You kind of touched on it a little bit. You alluded to production cycle times being lengthened. A, I was wondering if you could quantify that, but your sales pace this quarter at over 5 a month is I think a company high and I'm curious what are your actual housing starts running at? Are you starting 5 or 6 homes a month per community right now, and if so, could that piece be sustained or even improved, and if not, does that mean that you have to kind of pull the range and a little bit on how quickly you're selling going forward?

[Robert Schottenstein, CEO and President]

Let me say a couple of things and then maybe Phil can really provide a more precise response. This is probably close to record pace for us. I think you're right. I actually did not check that. Our Smart Series communities the pace is slightly greater than 6 and even on our non-Smart Series communities, our paces in excess of 5.

So we're seeing across the board really strong response to all of our communities and that's important to note, because for the foreseeable future or maybe forever, at least half, if not more of our business will be non-Smart just because of the nature of our operating strategy, not wanting to have too many of our eggs in any one basket. The -- so I think that that's part of the pace answer.

The other thing I'll just point out is our cycle times have been stretched and they're probably a little more stretched today than they even were a month or two ago. It's the problem continues to get worst by days at a time, maybe a week. It's not horrible, but what have we lost Phil about three weeks or so.

[Phillip Creek]

Yeah. It looks like cycle time is up about 10 days. Again, Smart Series is a little different than what our non-Smart is, but it is up about that and we're kind of thinking it may get a little bit worse than that. As far as your question from a start standpoint, kind of the run rate these days, Alan, is we're starting about 900 homes a month. Bob talked about that run rate, as you know 10,000 when you can't look at what we're running at right now. When you compared that the last year that number was about 700. Obviously last year at this time a lot of things were going on. But we do feel good that we've been able to ramp the production side of the business up. But again still want to make sure we deliver a quality home, take care of our customers. So, overall, we feel pretty good.

I mean, the deliveries in the first quarter were a little stronger than we thought. All things considered with taxes and all the challenges and it looks like we're going to have a good strong second quarter hopefully. I think we're doing our pretty good job as best we can managing the supply and the cost side jumping around.

When you look at the cost side of the first quarter, every market is a little different. There was like a 3% to 5% increase on the cost side as far as materials and labor. Lumber tended to be $5,000 to $6,000 a house and again trying to handle that as best we can. But overall, we feel like -- if you look at the margins from the fourth quarter, excluding the impairment, we took the margins in the fourth quarter were 24%. So this quarter, they were up about 40 or 50 basis points. We felt pretty good about that.

[Alan Ratner, Zelman and Associates]

Great. Well, I appreciate all that you tell guys and keep up the great work.

[Robert Schottenstein, CEO and President]

Thanks a lot.

[Phillip Creek]

Thanks.

[Operator]

Our next question comes from Alex Barron with the Housing Research Center. Please go ahead.

[Alex Barron, Housing Research Center]

Good afternoon, guys. Great job on the quarter.

[Robert Schottenstein, CEO and President]

Thanks.

[Alex Barron, Housing Research Center]

I have a question regarding interest expense. I think this quarter you guys expense $8 million through the cost of goods sold and a $1 million below the line. And I think your interest incurred is roughly $10 million. So, going forward, is that going to be roughly the amount that we should expect in cost of goods sold and nothing in the under the line?

[Phillip Creek]

Alex, as far as the interest incurred, we were -- we feel really good about our capital structure. And as I said in the prepared remarks, the interest incurred actually was less than this year than they were last year. As far as what flows through what line, Ann Marie, can you help any with that?

[Ann Hunker, VP, Corporate Controller]

Well, I mean, what flows through the is about as a percentage basis you can kind of keep the same what below the line is impacted also by land development. So it's choppy. It depends on how much we have under development, how much gets capitalized. So it can vary, but not by a ton, but going through cost of sales, it's about the same percentage of the total cost of sales.

[Alex Barron, Housing Research Center]

Yeah. I guess my point is, it seems like you guys are getting to a scale where $10 million ought to be kind of a ceiling, right? It would, in other words, you're going to start to see some leverage from interest expense.

[Ann Hunker, VP, Corporate Controller]

A little bit, hard to...

[Phillip Creek]

I would think we would...

[Ann Hunker, VP, Corporate Controller]

The land development.

[Phillip Creek]

Yeah. I mean you look as far as what we do, the interest expense line, it was what $4 million last year and $1 million or $2 million this year, but we don't -- we only have 1% of the total balance sheet in capitalized interest. Our interest incurred we feel really good about. So, hopefully, we're getting good efficiencies there just like we do everywhere else. We are developing a little more of our own loss today than we were a year ago, but overall we feel pretty good about that.

[Alex Barron, Housing Research Center]

Okay, great. And then with regards to capital allocation, I believe you guys -- obviously you're growing quite a bit. So I'm just kind of wondering if you could share your thoughts around you're generating cash it looks like your optioning more lots, is there any thought to do any share buybacks or start a dividend.

[Phillip Creek]

Well, the first thing, if you look at last year, we spent about $730 million on land between land purchases and land development. We talked about in the first quarter, we spent more than the last year given any estimate, but we do expect to spend significantly more this year than last year on land. So we do need to buy more land to continue our growth. We continue to look at what we need in the business, feel very good about where our leverage is now. Watch that very carefully. But we'll continue to have discussions internally and with our Board about possible stock buybacks, dividends, those type things. But right now we feel like with a little bit of cash and a relatively low leverage that's kind of what we want to be right now. We feel good about where we are.

[Alex Barron, Housing Research Center]

Okay, great. And one last one, can you guys comment on what percentage of your orders or closings were coming from the Smart Series versus a year ago, is that same thing on your land holdings, what percentage of your lots are kind of allocated for Smart Series versus a year ago? Thanks.

[Robert Schottenstein, CEO and President]

On the sales side, I think I said in our remarks, Alex, 35% of our total sales were Smart Series versus about 30% a year ago, 19% two years ago. I don't have the closing percentage in front of me. Do you have the percentage land holding, Phil?

[Phillip Creek]

I know it's a little bit...

[Robert Schottenstein, CEO and President]

About a third of our total communities are Smart Series communities, but they tend to be larger in number of lots. So it could be -- it would be -- it would stand and the math would suggest that a greater percentage of our lots greater than one-third are Smart Series.

[Alex Barron, Housing Research Center]

Okay. Well, great. Keep up the good work. Thank you.

[Robert Schottenstein, CEO and President]

Thank you.

[Phillip Creek]

Thanks.

[Operator]

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Phil Creek for any closing remarks.

[Phillip Creek]

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

[Operator]

[Operator Instructions]