M/I Homes Inc

NYSE:MHO

Earnings Call Transcript 2018-Q4

[Operator]

Good afternoon. My name is Rochey and I will be your conference operator today. At this time, I would like to welcome everyone to the M/I Homes Fourth Quarter and Year-End Conference Call. [Operator Instructions] Thank you. Mr. Creek, you may begin your conference.

[Phillip Creek, IR]

Thank you. Joining me on the call today is Bob Schottenstein, our CEO and President; Tom Mason, EVP; Derek Klutch, President of our Mortgage Company; Ann Marie Hunker, VP and Corporate Controller and Kevin Hake, Senior VP.

First to address Regulation Fair Disclosure, we encourage you to ask any questions regarding issues that you consider material during this call, because we are prohibited from discussing significant non-public 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 disclosed 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 will turn the call over to Bob.

[Bob Schottenstein, CEO and President]

Thanks, Phil and good afternoon. Thank you for joining our call to review our 2018 fourth quarter and full year results. 2018 was a strong year for M/I Homes, highlighted by record revenue, record homes delivered, record new contracts, a 17% increase in pre-tax income and a 49% increase in net income. More specifically, revenues reached $2.3 billion, 17% better than 2017. We closed 5778 homes, a 14% increase over 2017. We sold 5845 homes, 10% better than 2017 and pre-tax income before unusual charges improved by 13% to $154 million.

Net income reached a record high of $108 million, 63% higher than 2017. We ended 2018 with a very strong backlog valued at $897 million, 13% better than at the end of 2017, and backlog units of 2194 homes which is 9% than at the end of 2017.

In addition to our full year records, we also achieved record fourth quarter closings with 1825 homes delivered, 15% better than a year ago, and record fourth quarter revenues increasing 16% to $722 million. From a sales standpoint, I have a number of comments to make; first, we have achieved consistent, steady sales growth over the past 10 years, with a 12% compounded annual growth rate over that period.

Our sales in 2018 were very strong in the first half of the year, and then began to trail off in the latter part of the year, as overall demand for new homes began to decline and we like our competitors experienced more (inaudible) conditions brought about from rising rates and pressures on affordability. As a result, our fourth quarter sales declined 4% year-over-year.

The economic uncertainty and choppy conditions of late last year are, I believe still with us, though there does appear to be a bit more optimism, as we now begin the spring selling season. Our January sales were down 9% from a year ago, that said, it happened to be our second best January ever and we were dealing with a quite difficult comp from last January where our sales were up 24% in January of 2018. And I should also note that recent traffic trends suggest an uptick in traffic.

In response to the more challenging housing conditions and concerns with affordability, we continue to experience very good market reaction to our smart series. As you will recall, we first introduced our more affordably priced Smart Series line of homes in Tampa in 2016. Since that time, we have expanded considerably the number of communities and markets where we offer the Smart Series line.

By the fourth quarter of 2018, our Smart Series was offered in 10% of total M/I communities and in 10 of our 16 markets comprising more than 10% of total company sales. We are excited about additional Smart Series communities being rolled out in 2019, specifically by the end of 2019; we expect to be selling our Smart Series homes in 14 of our 16 markets and accounting for more than 15% of total company sales.

Shifting now to our financial services segment; M/I Financial had an excellent year of 2018 setting records for loans originated as well as revenues. M/I Financial is and for many years has been a soundly managed operation and is very profitable for us. Derek Klutch, our President will report on these results in a few minutes.

Our balance sheet and liquidity remained strong. We ended the year with a very healthy homebuilding debt-to-capital ratio of 44% and our net worth reached an all-time record of $855 million. We opened 67 new communities during 2018 and ended the year with 209 active selling communities. So, we are well positioned as we begin 2019.

Now I’ll provide a bit more detail about our various markets, beginning with the southern region, which is comprised of our three Florida and four Texas markets. In the southern region, we delivered 760 homes during the fourth quarter and 2579 for the year, which was a 22% increase from 2017 and represented 45% of company total. New contracts in the southern region increased 1% for the quarter and 15% for the full year.

The dollar value of our sales backlog in the southern region at the end of 2018 was up 15% and our controlled lock position in the southern region decreased 8% compared to a year ago. We had 90 communities in the southern region at the end of the year, which was an increase of 3% from a year before, and we are continuing to make real progress in growing our operation in Sarasota, Florida, which is the newest of our southern region markets, where in Sarasota we now have eight communities open and selling.

And I should note we continue to make noticeable progress in our Texas markets with improving scale and improved financial performance in 2018. We also had very strong market positions in both Orlando and Tampa each continues to be a highly profitable operation for us.

Next moving to the mid-west region which consists of Columbus, Cincinnati, Indianapolis, Chicago, Minneapolis and Detroit. We had 769 deliveries in the mid-west in the fourth quarter and 2317 for the year which is a 21% increase from a year ago and 40% company total. New contracts in the mid-west were actually down 4% in the fourth quarter, but up 17% for the total year. Our sales backlog in the mid-west was up 19% from the beginning of the year in dollar value and our controlled lot position in the mid-west increased by 13% compared to a year ago. Both of which were positively impacted by our recent 2018 acquisition of Detroit.

We ended the year with 90 active communities in the mid-west. This is a 30% increase from December of the year ago and that includes 12 communities in our newest market in Detroit. Overall, the mid-west continues to perform well for us with our Columbus and Chicago divisions especially solid and Minnesota achieving very sound and substantial growth. We are making good progress with our Detroit operation to-date and the market there remained solid.

Finally, the Mid-Atlantic region, Raleigh and Charlotte have for many years been strong markets for us. Raleigh had another solid year in 2018, but did experience a fall-off in sales in closings as well we experienced a fall-off in sales in closing in Charlotte. Charlotte’s fall-off was primarily due to the ways in getting new communities online. We are working to open new replacement communities in both Raleigh and Charlotte in 2019.

The DC market continues to be challenging for us. We have considerably reduced our investment level in DC as well as the number of active communities in that market. We ended the year with 29 total communities in the Mid-Atlantic region which is a 9% decline from the beginning of the year, new contracts in the Mid-Atlantics were down 14% for the quarter and sales backlog was down 10% from the start of the year. We delivered 296 homes in the Mid-Atlantic region for the fourth quarter, this was down 3% from a year ago and we delivered 882 homes in the Mid-Atlantic region for the full year, which represents 15% of company total. Our total controlled lots in the Mid-Atlantic region as of the end of the year decreased by 5%.

Before turning the call over to Phil, let me conclude by saying, that housing conditions are clearly more challenging today than they were a year ago. Demand has softened, affordability is an issue, and we are likely to continue to seeing some margin pressure. With that said however, we enter 2019 with a very solid backlog, excellent communities and a number of planned new communities opening. We believe we are very well positioned as we begin 2019.

With that, I’ll turn it over to you Phil.

[Phillip Creek, IR]

Thanks Bob. As far as financial results, new contracts for 2018 increased 10% to an all-time record of 5845. 2017 was our previous record high for sales up 11% over 2016. For the fourth quarter, our new contracts were up 6% in October, down 5% in November and down 14% in December for a total 4% decline compared to last years’ fourth quarter.

In 2017, fourth quarter sales were up 22% over the prior year. Traffic for the quarter was up 4%. As to our buyer profile, about 36% of our fourth quarter sales were the first time buyers compared to 33% in 2018 third quarter and 52% of our fourth quarter sales were inventory homes compared to 44% in 2018 third quarter. Our community count was 209 at the end of the year, up 11% versus 2017 year end. The break down by region is 90 in the Mid-West, 90 in the south and 29 in the Mid-Atlantic.

During the quarter, we opened 13 new communities while closing 16, and for the year we opened 67 new communities and closed 56 and for the year our average community count was up 12%. For 2019, our current estimate is that our average community count for the year should be up approximately 5% from the average of 205 communities in 2018.

We delivered 1825 homes in the fourth quarter delivering 64% of our backlog compared to 67% a year ago. Revenue increased 16% in the fourth quarter of ’18, reaching a fourth quarter record of 722 million. This was primarily a result of an increase in a number of homes delivered to higher average closing price and record fourth quarter revenue from our financial services operations. Our average closing price for the fourth quarter was 383,000, a 3% increase when compared to last years’ fourth quarter average closing price of 372,000, and our backlog average sales price is 409,000, up 4% from a year ago.

Land gross profit was 1.5 million in 2018 fourth quarter and 2 million for the full year of 2018. This compares to 2 million in 2017 fourth quarter and 2.8 million for the full year of 2017. We sell land as part of our land management strategy and as we see profit opportunities.

Excluding the purchase accounting charges from our first quarter acquisition and impairment charges taken during the fourth quarter, our fourth quarter operating gross margin was 18.9%. This is down 90 basis points from a year ago, and for the full year of 2018, our comparable gross margin 19.9 versus 2017 20.9. And our fourth quarter construction costs were about flat when compared to last year. We reported 6 million of impairment charges in 2018 fourth quarter, with 2.5 million related to deposit write-offs on terminated land deals.

Our fourth quarter SG&A expenses was 11.1 of revenue improving 120 basis points compared to 12.3 a year ago reflecting greater leverage. Improving our operating efficiencies continues to be a major area of focus. And for the year, our SG&A expense ratio was 12.3%, a 70 basis point improvement compared to 2017 13.0%. Our fourth quarter pre-tax results were impacted by 600,000 of purchase accounting expense related to first quarter Detroit acquisition in addition to the impairment charges discussed above.

Interest expense increased 300,000 for the quarter, compared to last and increased 1.6 million for the 12 months of 2018. The increase is due to higher outstanding borrowings this year as well as a higher weighted average borrowing rate for the year. And interest incurred for the quarter was 13.1 million compared to 11.3 million a year ago. We had 20.8 million in capitalized interest on our balance sheet; this is about 1% of our total assets. Our affective tax rate was 27% in 2018 fourth quarter compared to 34% in last years’ fourth quarter. That’s exclusive of the 6.5 billion additional tax expenses for the remeasurement of our deferred assets in 2017 fourth quarter due to the Tax Act and Jobs Act.

Our 2018 rate benefited from the Tax Cut and Jobs Act and energy tax credits under the Budget Act for 2018. We expect our 2019 effective tax rate to be around 26%. Our earnings per diluted share for the quarter increased 47% to $1.32 excluding the impact of acquisition related costs and impairment charges of $0.17 per diluted share. And during the second half of 2018, we repurchased 1.1 million of our outstanding shares.

Now Derek Klutch will address our mortgage company results.

[Derek Klutch, President, Mortgage Company]

Thanks Phil. Our mortgaging title operations achieved a fourth quarter record of pre-tax income of $5.4 million, up $800,000 from the prior year. This is a result of a greater number of loans originated as the financial services operation benefited from the increase in homebuilder closings compared to last year. We also experienced faster delivery and investor funding times versus the same period of 2017, which contributed to a significant increase in the volume of loans sold in the quarter.

Partially offsetting the higher volume, we continued to see lower pricing margins on loans originated compared with the prior year due to competitive pressures. Additionally, we experienced higher expense levels due to startup of new mortgage and title operations in certain of our markets. A loan-to-value on our first mortgages for the fourth quarter was 81% in 2018 down from 2017 fourth quarter of 82%. 79% of the loans closed in the quarter were conventional and 21% were FHA or VA, compared to 77% and 23% respectively for 2017 same period.

Our average mortgage amount increased to $300,000 in 2018 fourth quarter, compared to $297,000 in 2017. Loans originated increased 7% from 1165 to 1242, and the volume of loans sold increased by 21%. For the quarter, the average borrower credit score on mortgages originated by M/I Financial was 747, the same as last quarter. Our mortgage operations captured about 80% of our business in the fourth quarter; this was down from 82% in 2017 fourth quarter due to the competitive pressure mentioned earlier.

Because of our typical high volume of fourth quarter closings, we include seasonal increases in our mortgage warehouse credit facilities, with temporary availability of $225 million through January of 2019, after which time the total availability returns to $175 million. At December 31, we had $113 million outstanding under our primary warehousing agreement, which is a $125 million commitment that expires in June 2019. We also had $40 million outstanding under a separate $50 million refill facility which expires in October 2019. Both are typical 364 mortgage warehouse lines that we extend annually.

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

[Phillip Creek, IR]

Thanks Derek. As far as 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 12/31/18 was 1.7 billion, an increase of 260 million above 12/31/17. This was primarily due to higher investment levels in our backlog, higher community count and more finished lots.

Our unsold land investment at 12/31/18 is 782 million compared to 659 million a year ago, and at December 31, we had 294 million of raw land and land under development and 488 million of finished unsold lots. We owned 6011 unsold finished lots with an average cost of 81,000 per lot and this average lot cost is 20% of 409,000 backlog average sales price.

Our goal is to maintain about a one year supply of owned finished lots. The market breakdown of our 782 million of unsold land is 321 million in the Mid-west, 323 million in the south, and a 138 million in the Mid-Atlantic. Lots owned and controlled as of 12/31/18 totaled 28,700 lots, 49% of which were owned and 51% under contract. We own more than 14,000 lots of which 40% are in the mid-west, 46% in the south and 14% in the Mid-Atlantic. A year ago we owned 11,600 lots and controlled an additional 16,900 lots for a total 28,500 lots.

During 2018 fourth quarter, we spent 74 million on land purchases and 70 million on land development for a total of 144 million, and about 57% of the purchase amount was raw land. For 2018, we spent 552 million on land purchases and land development, and about 54% of purchased amount was raw land. Our estimate today for total 2019 land purchase and development spending is 575 million to 600 million.

At the end of the quarter, we had 591 completed inventory homes and 1443 total inventory homes. And of the total inventory, 592 were in the mid-west, 692 were in the southern region and 159 in the Mid-Atlantic. At 12/31/17, we had 477 completed inventory homes and 1134 total inventory homes. To compare, we had 2.8 finished [specs] per community at 12/31/18 versus 2.5 at 12/31/17.

During the fourth quarter, we repurchased 630,000 of our common shares spending 14.6 million. Our financial condition continues to be strong with a record 855 million in equity and home building debt-to-cap ratio of 44%. In 2018, we generated 210 million of EBITDA, up 14% over last year. And 12/31/18, there was a 117 million outstanding under our 500 million under secured revolving credit facility, and our book value per share is now at $31.

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

[Operator]

[Operator Instructions] And your first question is from the line of Alan Ratner with Zelman & Associates.

[Alan Ratner, Zelman & Associates]

Good afternoon and a nice job in a difficulty environment in the quarter. My first question on the overhead leverage, very impressive in the quarter and if I looked back at your prior fourth quarter, as you know we’ve in the last few years, you typically had a step up in your G&A expenses 4Q versus 3Q and it didn’t look like you had that this quarter. So I’m curious if there’s anything kind of one time in there may be related to compensation, just given the stock price performance last year that didn’t show up or if there’s other cost cutting measure that might have resulted in that lower than expected expense?

[Bob Schottenstein, CEO and President]

As far as the specific question and maybe Phil wants to add to this, this has been an area of great focus of ours for the last several years and that is improving our operating leverage, and some of that should happen naturally by virtue of increased volume, but we think we have been focused on watching and managing our expenses. It was good to see this improvement; it helped offset the otherwise decline in gross margins as you well know. Phil did you want to just add anything?

[Phillip Creek, IR]

No, Alan there’s wasn’t anything in there of any significance, quite positive the biggest thing is just getting additional scale in our Texas market etcetera that’s what’s helping us.

[Alan Ratner, Zelman & Associates]

And then second question pivoting to the margin, obviously it was down a bit this quarter, and Bob I think you mentioned, it sounds like there’s going to be further pressure there, which is not too surprising. Can you just talk a little bit about your thought process during the quarter on incentives, how much of this quarter’s margin softness was related to maybe discounts you had specifically on spec sales, that’s my first question.

And then just thinking about January, orders down 9 and where do you sit today on incentives, are you trying to ratchet back the discounts a bit, are you maintaining them, increasing them, just thinking about the price versus space equation heading in to the spring?

[Phillip Creek, IR]

The first thing Alan when you look at specs, we did sell a few more specs in the fourth quarter. We talked about 52% of our fourth quarter sales or inventory homes compared to 44% in the third quarter. So there were a few more specs running through there. Other than that really it’s just sub-division by sub-division, business we obviously market price, competitive price. Overall we’ve got really pretty good about the bottom results, but conditions are choppy, you just have to adjust to what’s happening in the market place.

[Bob Schottenstein, CEO and President]

And right now as of this moment, I don’t see the margin pressure any greater now than it was a month ago. I don’t think it’s intensified. It’s easier to not react properly given what’s happening out in the field. It’s very hard to know whether the conclusion you might reach based on one weeks the sales business or upticks and traffic is the beginning of a trend. I think there is just a little bit for all the commentary that we’ve now seen and heard from experts, other builders and so forth.

Conditions are just uncertain, I feel like there’s a little more optimism now than there was a month or two ago, clearly this is seasonally just normally a better time anyway. But as I mentioned in my comments, we’ve seen an uptick in traffic, and that’s encouraging, but I don’t think margin pressures are greater now than they were a month or two ago. So, we’ll just have to wait and see how this so called selling season plays itself out.

Our sales were down 9% in January. I hate trying to explain ups any more than I try to explain downs, but we were dealing with a difficult comp, a massive record of January of ’18, up 24% from a year ago. So that was a tough one to begin with, but they were still down, and we had more communities and I think it’s a reflection of just the market that we’re in.

We’re seeing better sales pace in our Smart Series communities and there’s more and more of those rollout get open, as it becomes a greater percentage of our business. It’s never going to become half the business, but whereas a year or so ago it was about 5%, at the end of last year it was closer to 10%. It will be trending above 15%. As we move through 2019, I think that will help things both on the pace and margin side.

[Alan Ratner, Zelman & Associates]

That’s really helpful. And just one last comment, I’m guessing the frigid temperatures didn’t help your end of the month in January either especially in the mid-west?

[Bob Schottenstein, CEO and President]

Well, probably not, but on the other hand when its gets warmer I’m not sure that you see things giantly improve all the time. So, yeah it certainly does, when everything is closed it doesn’t help I agree.

[Operator]

And your next question is from the line of Arjun Chandar with JP Morgan.

[Arjun Chandar, JP Morgan]

Just wanted to ask a quick question on the balance sheet, with your 6.75 notes stepping down a 101 spot seven call price recently, I wanted to get your thoughts on a potential refinancing in the near term especially in light of one of your competitors being in the high yield market today?

[Phillip Creek, IR]

May be Kevin, he can answer that question.

[Kevin Hake, Senior VP]

This is Kevin, we don’t have any immediate plans to do anything where you’re continuing to look, we certainly have known and we had to stepped down coming up in the call [prim] it’s still above par and we kind of had the window closed for a good part of last year. We’re encouraged that it does look like the markets opened for issuers again, after I think in December we’ve none in the market, and we’ll continue to monitor conditions. But our good news is nothing comes due for some period of time and we had very little really used under the credit facility at the end of the year and we feel pretty comfortable with our maturing structure going forward and have nothing urgently where we really need to do anything.

[Operator]

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

[Jay McCanless, Wedbush]

Bob a quick question, when you were talking Smart Series and you threw out the numbers of 5, 10 and then looking for 15% this year, is that 15% of revenues or 15% of closings?

[Bob Schottenstein, CEO and President]

The specifics on that are as follows Jay, what I said was that last year 2018, as of the fourth quarter, Smart Series homes were offered in 10% of total communities and in 10 of our 16 markets and comprised more than 10% of total company sales units. We expect and are excited about additional Smart Series communities being rolled out this year and by the end of 2019 as we move in to the latter part of the year, we expect to be selling Smart Series homes in 14 of our markets and it will likely at that point account for more than 15% of total company sales units. A couple of years ago that would have been less than 5% of total units.

[Phillip Creek, IR]

And if you look today Jay, the average sales price in Smart Series community is about 275.

[Jay McCanless, Wedbush]

So when you’re going out to buy more land for the Smart Series communities, what is the competitive – is it more competitive now than it has been in years passed and are you getting any better looks at land with some of the pullback that we’ve seen recently in demand.

[Bob Schottenstein, CEO and President]

All good land is competitive. In some markets its particularly difficult frankly from my point of view its less so much our competitors, it’s more of the regulatory process that in some markets has a much more negative view of higher density, more affordable housing. That’s one of the largest contributors in my judgement towards the nationwide affordability pressures.

A lot of the deals that we have rolling out this year; we’ve been working for more than a year or two. Takes a long time from the time you put it in contract, to take them through the zoning process, to get them fully entitled to the point where you’re ready to finally close on the property, and so we’re excited about with what’s coming. It’s stuff that we’ve been working on for quite some time and look forward to seeing that product being offered in a number of cities where we’re currently not offering it.

So we’ll have to see how that plays out during this year, but we certainly have high hopes and excitement about it.

[Jay McCanless, Wedbush]

We heard some of your competitors talk about gross margin tailwind from lumber essentially coming in some time this year, could you maybe talk about when if lumber prices stay around these levels, when you think you might see that tailwind. And then also may be talk a little bit about base pricing, have you been able – even though some of the weaker demand be able to move base prices up and maybe get a double tailwind as you move in to the spring.

[Phillip Creek, IR]

Jay, first from the cost standpoint, as we said earlier, when you look at overall sticks and bricks, they were kind of flat in the quarter. Lumber has been coming down as far as the benefit of that, it’s more the second and third quarter of this year. That’s from the cost side; the other issue of course is what happens to the revenue side. Every sub-division is different; we do plan to open more communities this year than we did last year. Hopefully especially in those new communities there’s opportunity to have good margins. There’s still communities we are raising prices in, but the biggest majority of our communities do have pricing pressures. Will that price be down more than the sticks and the bricks cost, who know. But our view is that it is competitive out there, it is choppy and that’s just what we have to deal with.

[Jay McCanless, Wedbush]

And then the last one from me, and I think you’ve probably this the balance question, but what are you seeing from your competitors either from price discounting on finished specs or increased incentives on to be built. What’s happening with that in your different markets?

[Bob Schottenstein, CEO and President]

I don’t think I can give a consistent answer on that, because I think everybody has done a little bit more incentivizing beginning in the fourth quarter of last year. We’re in the subdivision business and many of our competitors I think are very focused on managing on the subdivision by subdivision basis as opposed to putting out an eject that we’re going to start discounting x percent everywhere.

We certainly manage on a subdivision by subdivision basis, and in some markets there may be less of a competitive reason to incentivize than in others. And in some situations, our own situation to close our community perhaps or we’re down to the last number of lots. I think incentives and margin cutting has levelled off if you will from what it was in the balance of the latter part of the fourth quarter. I don’t see anything much more happening quite right now than it might have been then.

We’re doing a little bit, but we’ve tapered down some other things to offset it. But I think we’re all trying to strike the balance, the happy balance between price and pace, and that’s what we’re trying to do. And I think we’re doing a pretty good job.

[Operator]

[Operator Instructions] and your next question is from the line of Alex Barron with Housing Research Center.

[Alex Barron, Housing Research Center]

I wanted to ask a couple of questions, one was on the Smart Series, curious what percentage of your recent land purchases are geared towards Smart Series?

[Bob Schottenstein, CEO and President]

I don’t know if I could answer that too specifically, other than to say that we’ve always been a very strong move up builder and we’ve also over the years, and I go back to the early 90s, when we had a line of affordable houses that would be similar if you will to our Smart Series today. We’ve never tried to be the most down and dirty and we’ve always tried to offer more quality and more features per square foot than our competitors, and we’ve never said we’re going to be all one thing or all another.

I see over the coming year or two our Smart Series being somewhere around 20% of our business. It might be closer to 15, it might be closer to 20 or it might be a quarter or so where it peaks up above that. And I think our land purchases probably would roughly fall in line with those percentages. Clearly in some of our divisions, there might be some situations where it accounts for more than that where they’re ramping up to begin offering it for the first time and at least for the near term makes up a more significant portion of their land purchases.

But I don’t see us radically changing our strategy too much. We’ve achieved really good growth goals staying true to what do best and we intend to continue to do that.

[Alex Barron, Housing Research Center]

And my second question has to do with your philosophy around specs. So some builders think like they’ve tilted more in the direction spec building, could procure labor and so forth. But I feel like, as I visit markets that there’s a lot more inventory from everybody, and argument for more built to order and less specs is that you wouldn’t have as much pressure to incentivize those spec sales. So I’m kind of questioning how you guys feel about it or if you’re leaning more in one direction or the other?

[Bob Schottenstein, CEO and President]

Alex that’s something that we constantly look at, and again it depends on the market on a subdivision basis. We haven’t really changed dramatically, we’re like it. 2.8 finished spec per community and a year ago we were what 2.5 or whatever. Do we have a few more specs and a Smart Series community than in other M/I community? Yeah. If we’re doing a few more townhouses that usually gives us a few more work. But our philosophy has not really changed, of course it’s also impacted some when you’re getting out of communities you might expect the last 4 or 5 to go ahead and get out and to try your cost better.

But we believe in putting the best houses on the best lots. When we spec it, we try to manage it what we do in every other part of our business. But our philosophy really hasn’t changed much in the last couple of years, but it is something we continually look at.

[Operator]

[Operator Instructions] we do have a follow-up question from Jay McCanless with Wedbush.

[Jay McCanless, Wedbush]

Just wanted to ask on the cancellation rate that was up about 5 percentage points versus last year, was there any geographic notes there, heavier concentration in the Mid-Atlantic or one of the regions that you could call out?

[Bob Schottenstein, CEO and President]

It was a little more in Texas. It’s kind of where it was Jay. But still when you look at overall, we’re comfortable with our [can] rate.

[Operator]

[Operator Instructions] and there are no other questions at this time.

[Phillip Creek, IR]

Thank you very much for joining us.

[Operator]

This concludes today’s conference call. You may now disconnect at this time.