MI Homes Management Presents at Citi 2013 North American Credit Conference (Transcript)

Nov. 8.13 | About: M/I Homes, (MHO)

M/I Homes, Inc. (NYSE:MHO)

Citi 2013 North American Credit Conference Call

November 6, 2013 8:45 AM ET


Kevin Hake – SVP, Finance and Business Development, Treasurer


James Finnerty – Citigroup

James Finnerty – Citigroup

For those that weren’t here for the earlier presentation, my name is James Finnerty. I cover the homebuilding industry and credit side for Citigroup. It’s our pleasure to have management from M/I Homes this morning with us. Presentation format is fireside chat that will naturally can some opening comments after which I’ll lead out interactive discussion.

Today, we’re joined by Kevin Hake from M/I Homes. I’m going to hand it over to Kevin right now and then we’ll kick off the discussion afterwards.

Kevin Hake

Thanks, James. We appreciate the opportunity to come and present at Citi Credit Conference.

First, before getting started, I need to remind you that all the comments that I make in this presentation are governed by our statements regarding forward-looking language in our 10-K as also replicated here.

Some of you may not be familiar overall with the housing industry or particularly M/I Homes, so I’ll give you a little quick background on the company. We are one of the smaller cap of the public builders in terms of both our market cap and number of units delivered, but we are one of the nation’s and industry’s very fragmented lot of private builders and we are one of the largest in the nation, number 16 on the Builder 100 last year.

We’ve been in the business for a long time. Founded in 1976 and then public since 1993 and have delivered more than 85,000 homes in our history. We are currently in 147 communities as at the end of our third quarter in 12 markets and I’ll talk more about those markets in a minute. And we recently entered our 13th market Dallas Fort Worth. So we are not yet open in selling homes in Dallas, but we are actively – we have the leader for that market and are in the process of hiring a team and actively looking to begin purchasing some positions in that market.

Very excited about Texas. We've been growing actively into the Texas markets and I’ll talk more about that as well. We delivered about 2,765 homes for the full-year in 2012, $762 million of revenue. We think we are in good size and offer a great opportunity both for debt investors and equity investors and I’ll talk about some of the reasons why.

Our 2012 volume was 21% increase in the units and 35% increase in revenues. So we had already started the process of growing in 2012 and have continued to grow fairly actively this year. Our average sales price in terms of a price point is about $284,000 for our most recent quarter. And I want to talk number of times about one of things that differentiates us, we have a fundamental focus on quality and customer service.

It’s something we were founded on and something that is engrained throughout our company. It’s something that being in 13 markets, being a little smaller and more nimble. It’s something that we don’t take for granted, we don’t take our eye of that focus even in the slowdown, have continued to try to build our reputation in each of our markets for quality construction and very razor focus on customer service. A lot of builders talk about that. It’s something that’s well engrained in our company. We think it matters certainly over the long-term.

A couple of the highlights that sort of that we think will represent a good opportunity. Growth is one of the things I talked about. We think there is great opportunity to grow in our current markets as well as continue the process we’ve started of expanding steadily and selectively into some additional markets, most recently Texas, but before the Texas market, Chicago was a recent market entry for us.

Out of our current 13 markets, we have been in eight of those for more than 20 years including our home market in Central Ohio, Columbus, Ohio. And what we think is important is to have a top position in those markets. So I’ll show some additional position data in a minute, but we think we have done a good job of getting ourselves to be – we’re top 10 builder in eight of our markets.

For Texas markets, we’ve recently expanded to over the last couple of years. We’re growing in those markets. And we think it’s important to have a strong position in new markets. We also have mentioned our differentiation in terms of construction quality, we also think we have excellence in terms of our product design in meeting the customer response and needs.

We are not the very low-end builder. We have a range in product size, but we tend not to be competitive in the very low, high square foot for the dollar type competitive market. It’s not where we’re typically positioned.

In terms of our financial position, we’ve had a strong balance sheet. We reacted quickly to the downturn and generated cash and kept a healthy balance sheet with low leverage. We’ve enhanced by issuing some equity and convertible debt over the last year and are in excellent position with low leverage. We have an currently unused revolving credit facility of $200 million and $158 million in cash at the end of our most recent quarter.

I mentioned focus – I can't mention this enough, it’s something that’s very fundamental and important to us, but we did have a 95% customer satisfaction rating for the full-year in 2012, that’s something that is very important to us.

So people are very curious as to what we think is happening in the housing market in general with the slowdown that has occurred and then commented quite a lot since early summer. Through August for those of who aren’t following housing as much as closely, the new home sales across the country were at seasonally adjusted annual rate of 421,000 which is about a 15% increase over the prior year. 2012 was 22% increase over 2011 and some of you may recall 2011 was I believe the lowest year in history in terms of new home sales.

The chart at the bottom shows sort of a similar pattern for housing starts. These are single family starts and permits. And you can see the course that we fell off. We started to slowly and steadily improve and we would expect that to continue. We think we have a long way to go before we get back to normalized levels of what – you can debate how much we were overproducing in the couple of the years in mid-2000, but we feel it’s pretty clear that we’re under-producing and have been under-producing for a couple of years and we’ll have opportunity to grow and get back to more normalized levels.

Couple of other factors. A lot of discussion about mortgage rates going up. They are still at very low attractive levels and it’s been at low to mid fours for 30-year. The level of ARMs is still very low. There is still opportunity if rates do move up for people to shift using more ARMs. Mortgage financing, lot of discussion about whether there will be additional changes and availability.

Right now we’re very comfortable with the current market and have not had difficulties in our customers that we think are qualified to buy homes in terms of their credit score, something about 640 [ph] we’ve been able to find mortgage products and availability for them. The other factor that isn't discussed as much is the supply constriction that’s occurred in the resale market. And this chart at the bottom shows, we came down to starting this year with the level of months’ supply inventory and our last listings in any year since 2005.

What that’s done is it’s created some of the price inflation that’s occurring in resale and it’s allowed people who want to come and buy one of our homes to much more easily and readily sell their current home. And often at a price that 10% or 15% higher than they might have thought they were going to be able to sell that home a year ago.

So that’s been a significant offsetting factor to increase in mortgage rates and the increase in sales price that we referred in the new home market. That’s been largely offset at least in the move up segments where people are selling an existing home.

This shows what we track as our pace of sales per community. We’ve been growing our communities, I’m going to talk more about that in a second, but – and we generally are not focused on trying to grow the company by growing our volume per community, but we were operating at a level that we thought was probably a little lower than normal in terms of pace of sales per community.

Last year for the full-year, we were about two contracts per month per community in 2012 through nine months, we are at about 2.1. This year we’ve increased that to 2.4, but again I don’t want to give the impression that our goal was to take that to three or four community. We are very generally above two to 2.5 per community as a pace we’re comfortable with.

You can see here a couple of other things, the pattern of the normal spring selling season where we do get a spike up and you can see the intensity of that spike up in spring selling season this year, as Meritage also commented, we generally outsold what we had expected for the first five, six of this year. It’s slowed down, but it’s sort of a normal seasonal slowdown per community and through September we’re comfortable. Our contract base was up 15% for the third quarter.

Other highlights of our third quarter. We’ve been increasing our profitability and making progress both in terms of our margins improving and our SG&A percentage ratio declining and getting additional overhead leverage. Pre-tax income for third quarter was up about 63% to $13.8 million. Gross margin improved about 30 basis points. Backlog sales value was up 46% year-over-year and we achieved now consecutive quarters of profitability that we determine that it was more likely that we would continue to have profitability and we were able to reverse the substantial majority of our deferred tax asset allowance in the third quarter of about $112 million.

That boosted our shareholders’ equity to $480 million. It gives us very healthy leverage of about 37% net debt to cap and had a $158 million as already mentioned in cash at the end of the quarter.

This is the summary of our performance looking back couple of years and showing you the nine month comparison for this year. Again, revenues up 35% last year and 37% for the nine months year-over-year. So we’re making good progress in terms of growth. EBITDA was up 66% for the first nine months.

We do have a Financial Services business. It provides mortgages for our home buyers. It does not generally do third-party business and it provides title services. We’ve been in business for long time and have an experienced management team that’s running for a long time for us has very good controls and dealing with the regulatory environment, which is very heavy for the mortgage business. It’s also profitable. Reported $3.5 million of operating pre-tax income from the Financial Services business for our third quarter. About an 81% capture rates, so we’re capturing more than three out of four out of every one of our home buyers through our mortgage company.

And you can see some of our other statistics on this slide, the average loan to value about 86%. FHA has gotten about 50% for us and its put back down out of 34% for the fixing quarter.

I’ve already talked about some of our key elements, in particular the strong position we think is important in each market. Focus on product excellence, reputation for quality and customer service. The other thing we think is very critical in this time is people. We’ve had a very strong emphasis on having a strong division leader in each of our 13 market operations and the key team members under them in terms of key sales leader and production leader in the land, both acquisition and development and very important that are key positions for us and we’re very focused as we grow in those positions.

I’ll talk more about our land position in a minute. And I talked about our growths and the opportunities for us to continue to growing our healthy balance sheet.

This just shows some photos of some of the homes in our various markets. And this as I promised earlier shows what we estimate. This is for 2012, we think we’ve moved up by a position in one or two of these markets, but the light green here shades the eight markets where we’re in the top 10 and the four Texas markets we expect to improve and get into that top 10 position in an certain orderly process.

The key is to have as many deliveries and get some efficiencies by having as many of deliveries in markets where you are a top builder and this shows our ranking that was done by one of the data analyst for the industry that shows that we’re not the highest but very well represented in terms of 78% of our deliveries for last year being in markets where we had a top 10 position. The concentration in those markets does vary quite significantly. And some top five builders have a much higher share than in other markets.

I already mentioned target on growing the company and we do that by growing our communities. We’ve given guidance that we expect to end the year, this year with about 25% more communities than we’ve started the year with. We had a 147 communities as of the end of the third quarter which was about a 15% increase but we are on track to open about 20-plus additional communities in the fourth quarter and can get to that 25% increase for the year.

We’ve also given guidance about spending on land. We’ve increased this year to expecting to spend in the range of $300 million to $350 million total for the year. We had spent about $224 million. This is both land acquisition and development spending. We had spent $224 million through the first three quarters. This gives us a position we think we’re very comfortable with in terms of our own supply, just about a three year supply of owned lots.

You can see the increase historically in the bottom part of this graph. We have been increasing that position. It totaled about 18,000 lots under control, just about half under options or under contracts that will subject to contingencies. And you could see the geographic breakdown. We’ve been shifting our focus towards our newer markets as well as to our Florida and Mid-Atlantic markets, so the growth in our lot position has increased year-over-year, 100% in the Southern region and 62% in the Mid-Atlantic. So that’s where we’re really getting most of the growth and our future opportunities.

There is discussion at various times about what’s the right land position to have. There is different builders with different strategies. And ours is not to have a 10-year supply. There are some builders out there with the 10-year supply and they may have historically operated that way and do very well with that and maybe in markets like California, that’s a good strategy. We are not in California. We’ve focused on having a lower and less – in our view, less risky lot supply. So we are one of the lower end in terms of what we own and try to control as much as we can under option and keep some flexibility.

The capital structure I already mentioned, 37% net debt to cap, healthy capital structure as of our most recent quarter end. And our leverage compares very well across the industry. I know you’re going to ask me some questions about rating agencies and we keep showing this chart to the rating agencies and they nod [ph].

EBITDA has been increasing and we expect to continue to improve. And our maturity ladder in terms of upcoming debt, nothing really till 2017. Our revolver is – nothing outstanding on. It comes due in 2016. So we have a long run ahead of us.

And I think I’ve hit the highlights. So with that, I would turn it over to James to ask questions.

Question-and-Answer Session

James Finnerty – Citigroup

Okay, thanks. So literally today we’re hosting housing finance panel and the topic of the panel is going to be the changing landscape in mortgage market and Fannie, Freddie, what’s likely to happen if anything at all. What’s your take in terms of the potential further to be subsequent housing reforms in 2014? Do you think there is the appetite for that to actually occur, or do you think it’s more of the status quo?

Kevin Hake

We don’t do a lot of predicting in terms of what’s going to happen to Washington and what the regulatory environment might produce. We watch it closely. We understand that it can affect us. I would say that our view and we do have to have some view in order to be comfortable with running our business and I would say that our view is that we do not think in 2014, there is likely to be substantial changes made to the government agency environment for mortgages.

We do think there is a risk that there could be substantial changes down the road, but we don’t see anything in 2014. We have the same view for 2013. We think that’s largely come to bear with the definitions that they’ve now put in place in terms of some of the regulatory definition.

James Finnerty – Citigroup

And in terms of just the mortgage availability and how it impacts your business, you highlighted that you’re doing finance [ph], but is there an expectation that over the next couple of years that the availability will increase and that could be sort of a supportive factor for the industry and offset any fear that maybe utilizing rates could hamper growth at this point of recovery?

Kevin Hake

I don’t think we’re extremely concerned about rising rates hampering the recovery. Historically, rising rates have occurred together with fairly strong and recovering housing markets as long as they don’t spike up as rapidly as they did in sort of 60-day period earlier this year. And as long as we get some job growth along with that – I think we’re probably more concerned with the lack of significant job creation, potentially starting to hinder the recovery in another year.

So I just thought I think we have ways to run but we do need to see some job growth is accompanying that at some point down the road. So we’re less worried about rates and don’t believe we need – we would be in favor obviously of some improvement and availability in mortgages, but we wouldn’t want it to get overheated and carried away with the way things were in the past. We think things are generally on track now and fairly comfortable with current availability.

James Finnerty – Citigroup

Okay. And moving on into order growth. Clearly this quarter order growth across throughout the industry came in below what analysts were expecting. And it was lower than we’ve seen over the prior four quarters. Things that have been listed have been – reasons for this have been home price appreciation despite the mortgage rates that are shutdown. How would you sort of rank those in terms of what you saw in terms of impacting the order growth? I know you and I had…

Kevin Hake

I don’t know. Yes, I would highlight that if I get the opportunity to, 15% order growth I think was one of the better and I think generally not far off of what our analyst coverage for us had anticipated. So we do feel – and some of that maybe that we’re not in this some of the markets that might have been a little bit more overheated earlier in the year like the Phoenix or Vegas or California, but I don’t know that I can rank those factors.

I think we have a stand – and we don’t have quantifiable measures to know why people pullback. We would suspect that it was a little bit of all those things and some variation. Clearly there was a pullback in consumer confidence and we have seen that quantified. And whether that was because of which of those factors, but they currently all contributed to some extent to consumer confidence pulling back.

We may have also escalated a mark a little bit earlier in the year in terms of people feeling that mortgage rates were going to go up and making decisions earlier and therefore took a little bit of low, but we just feel very optimistic and positive going forward. We’re going to go through the normal slow period of December and January and we feel very comfortable when we get into February, we’ll get back into a healthy spring sales market.

James Finnerty – Citigroup

And in terms of your different markets, where do you saw higher price inflation? Was the order of growth substantially different from where you had less price appreciation?

Kevin Hake

I don’t think we saw anything that we could correlate to that specifically. As I said, we’re not in somewhere where the inflation was in the double digits or I think our median sales rise quarter over – third quarter or year-over-year was up about 7%. We certainly had some markets where it was over 10% and somewhere it was less than 5%.

But on a community-by-community basis, we raised prices where we could. We didn’t get a sense of raising prices to the level where we shutdown sales. We felt that slowdowns are universal in across the board.

James Finnerty – Citigroup

And in terms of what you’re seeing from competitors, has anybody that had seen the order of growth slowing, you see people start to increase incentives or potentially think about reducing prices that sort of jumps back to order?

Kevin Hake

I think we’ve seen again very dependent on specific market and locations. I think we’ve seen some locations where some of our competitors have done more promotional. And we’ve put more effort into promotional and marketing definitely with the slowdown. I don’t think in terms of actual percentage reduction in price, we’ve moved much and I would say overall I don’t think we’ve seen the market move significantly in terms of reduced prices or significant increased incentives, but definitely much more competitive and promotional kind of environment. And some locations are definitely been couple of percentage points probably in terms of additional upgrades and options and mortgage closing cost and so there has definitely been a couple of points here and there.

James Finnerty – Citigroup

In terms of the seasonality, given it’s a third quarter of the year, do incentives tend to attract seasonality or is it more just a – sort of how is the market doing?

Kevin Hake

Incentives probably is interesting, as the prior folks commented on, the reality that home building division sometimes tend to react to whether they are hitting their budgets or not in any given month. And so you can at times see builders get more aggressive if they are trying to achieve certain targets, but most builders have already recognized that they are going to have a slower period during certain months, and so they’ve already factored that into their budgets and their expectations.

So generally feel a lot of motivation just that offering discounts that you don’t think are necessarily going to help you in a slow period and just deals that share get a couple of more sales from a competitor. Again if you can do that for a promotional aspect for very limited real cost reduction here, your real revenues then you’re going to consider doing that, but I don’t think – we haven't seen a lot of builders sort of slashing significantly in a period that’s low and when there just really isn't a lot of demand out there.

James Finnerty – Citigroup

Okay. And then the trend that we’re seeing across the industry this past earnings season has been gross margin improvement and reflecting the price increases as earned backlog. Is there sort of a healthy backlog besides the next couple of quarters in terms of benefiting your gross margin?

Kevin Hake

We do have gross margin or backlog at the end of September that was higher than what we reported for the quarter. So we would anticipate, but we do also continue to sell specs. I think 45% of our sales in the third quarter was spec homes. So earlier in the year, we were getting a margin on spec home sales very close to, if not in some cases exceeding our to-be-built, which is an indication that’s not necessarily typical so that’s an indication how strong the market was in the spring.

That returned over the third quarter more than of one point or so discount on average for our spec home. So backlog is one good indication of our margins going forward, but there is still uncertainty as to what would the gross margins will be on spec home sales. We just haven't given any guidance or forward-looking information. The other huge uncertainty is the cost on it, tremendous cost pressures for the last year. In some markets it’s more than others. It’s a combination of labor and materials and it’s difficult to forecast. And we’ve tried to lock that in for the homes that are currently under construction, whether those are specs or in backlog, but at some point after the next couple of quarters, it gets difficult to project what will be incurring on the cost side.

James Finnerty – Citigroup

And then moving onto land prices. In some markets, there has been land price appreciation of sort of very high numbers 50% in third quarter in terms of West Coast. From your key markets, how is land prices – how they tracked and have you seen over the last couple of months maybe a better dynamic in terms of being able to acquire A, B, C lots? And is there any availability of finished lots or is it more on the lot side that you have to do your acquisitions?

Kevin Hake

Several questions embedded in that. We’ve been able to achieve our targets for what we’re trying to acquire in each of our markets. That isn't to say it’s gotten any better in terms of the competitive environment. I think in all normal times, any of your land acquisition people will tell you they need to be chasing 10 or 15 different opportunities in order to get three or four.

And some of that is because of competition, some of that is because of contingencies that are required in terms of zoning and approvals, and usually you tie up something under contract contingent on getting the utilities and approvals that you need before you go hard or close on it. So I think the competition has continued to be very intense. In all likelihood, it’s gotten more competitive over the last 12 months, but we have been able to find the opportunities that we wanted to find.

We – as I said, we’re not typically the low-end kind of builder in a market at any price point. If the entry level is $110,000, then our entry level product is probably $130,000 or $140,000, just as an example. And we tend to put a little bit more into our home in terms of features and benefits as we like to say.

So we are very focused on premier locations, whether you call as A [ph] locations and we have not generally been finding a lot of finished lot opportunities. And it does vary by market. Even in couple of states where we have two divisions, we may be finding 40% of the opportunities in one market in finished lots and then the other market might be 65% or 70%.

But I think those are sort of the goal, there is very few markets, even the Texas markets which were historically more finished lot, take-down type markets, we are doing more of a development and buying more lots around and doing development ourselves.

James Finnerty – Citigroup

And talking about acquisition plan, popular topic has been the optioning process. And that there is actually some people willing to provide the service for the industry, again people are now saying transactions where they’re teaming up with financial sponsors to do options. Historically, what percentage of your business pre-downturn in your terms of your lots were option versus owned, and as shown on the slide there you have a 50-50.

Kevin Hake


James Finnerty – Citigroup

But, and where do you target it going forward?

Kevin Hake

I don’t think you know the history of that, we’ve been somewhere around 50-50 going back historically. We have not done either historically or recently the land banking arrangements that what you are sort of describing. It isn't to say we wouldn’t do those, we’ve looked at them. And they’ve historically and currently again being used by builders for a variety of reasons. One reason is those builders who are finding challenges getting capital, whether that’s some of the publics or certainly a lot of private I think are going back, because they are trying to grow and they just don’t have the capital as the big publics do. And they are going back to using some of the land banking structures in order to do that.

But we have plenty of capital, so we don’t feel pressure to do it for that reason, although at some point with our growth objectives it’s something we would consider. The other reason would be, somebody like Meritage who presented here before who fundamentally believes that having a hand under option is a better structure and it gives them flexibility. And we do certainly like options, but we stay very focused on trying to get the land developer to be the option A to us as much – the terms are generally better from the land seller in terms of the lower deposits.

At times if we can get a land developer, then they have a development risk rather than us being the one that guarantees them a completion on the land development side. So we would prefer it to do it with the land sellers wherever possible. And as I said that’s done difficult, but we continue to be focused on that as much as possible and we’ll continue to consider using a land banker.

You can make an argument that it’s better than owning it and having the development risk and all the land even if you have a 15% or 20% deposit that might be better than having full ownership. So we understand the argument in favor of it, so we continue to try to stay focused on using the land sellers as the options.

James Finnerty – Citigroup

Okay. So we’re to end in [ph] about five minutes, so I was hoping now that if anybody has any questions in the audience. Good. So of course being a credit conference I’ll ask you some really credit specific questions. In terms of ratings, credit metrics, liquidity, do you have any sort of stated public targets to have a certain rating or be higher rated, have certain credit metrics and like a minimum liquidity?

Kevin Hake

Yes, we don’t use – we don’t really target rating agencies. We sort of feel we want to be comfortable with credit metrics that we’re comfortable with over the long-term and would be hopeful and probably falsely optimistic if the rating would follow along with that in an appropriate manner, but we’ve been punished by the rating agencies I think for being small. And it’s sort of hard to find [indiscernible] lot of builders went out of business, it was kind of a free fall sort of three, four, five years as downturn lasted a lot longer than anybody would have predicted and was a lot more drastic.

So it’s kind of fun to criticize the rating agencies, but it’s not hard to understand that the industry went with was really a very severe downturn and we lost a lot of money over a number of years. So I do – your comment earlier that you made that the builders didn’t sort of do what they were supposed to do in terms of the larger public builders and we did generally stop buying ground, generated significant amount of cash and survived. And so you would hope that they would give us credit for that and our company in particularly we think proved itself through the downturn.

And the other part of your question, we don’t have an exact specific line where we think it’s too much leverage. We think you have to look at both leverage and land. A builder that has a 10-year supply of land and half of their assets on their balance is land and some of that land is maybe going to be developed and delivered in the next 12 months and some of it’s not going to be touched for five years.

They may be should operate at 30% leverage, to strong that number out, whereas there is other builders out there particular some smaller private builders who have done nothing but option land. And so if you look at their balance sheet, it’s almost all houses under construction. I think you can make an argument that they could operate at 70% leverage.

In our case with a focus on sort of a three-year own land supply, which is what ends up being on our balance sheet and if you sort of look at our asset breakdown, we think somewhere around a 50% ratio is a comfortable level for us over time in terms of net debt to cap. And in terms of liquidity and availability, I know we’ve mentioned we have a $200 million revolver and a $158 million of cash, we expect to be investing in our business.

We have small dividend on preferred shares. We don’t pay dividend on the common at least currently. And we are comfortable with our debt positions, don’t see us sort of taking out any debt at this point. So we’re really focused on using our cash and our liquidity to grow. I think the way we would – we don’t necessarily have a minimum target of liquidity, but I think the way you would see us operate is at some point we’ll begin to use our credit facility and get to where we had $50 million to $75 million or $100 million outstanding on it. You would see us go to the capital markets to access longer term debt to sort of term out. We will only use a revolver for short-term and seasonal needs.

James Finnerty – Citigroup

And in terms of revolver and utilizing it, pre-downturn the industry tended to do what you said in [indiscernible] revolver and then turn it out as needed. Do you have any different view in terms of utilizing revolver post the downturn. Is there less appetite for doing that?

Kevin Hake

I don’t think so. I think there is – the cash swings, they don’t know there is exhibit [ph] because of some of the characteristics of delivering a lot of homes in the last couple of weeks of the month and in last couple of weeks of a quarter. And seasonally typically in our fourth quarter, there is some significant cash swings. So a revolver is the most efficient way to manage that for short-term cash needs.

The builders were all focused on surviving, so we all had significant cash positions, but we were highly inefficient in terms of our returns on capital when we’re sitting on a bunch of cash that’s earning 1% or less. So we really need to keep our cash to pull it in the revolver. Using a revolver is a very efficient way to do that.

James Finnerty – Citigroup

And I guess time for one last question. Just in terms of your presence in different markets, you highlighted that you’d like to be in top 10 builders? Is there any difference in profitability from being number 10 versus number 4?

Kevin Hake

Yes, I don’t think there is a hard line. In some markets, just to be candid I think we’re in Cincinnati. There is really only four large builders in that market. I probably wouldn’t want to be a number nine in Cincinnati. Certainly we want to be at number 15. And that isn't to say that there isn't some small private builder is number 15 is doing okay, but not with the sort of scale and operation we want to have.

So it varies by market. The other end of the continuum might be Houston, where I think there is 20 or 30 building doing these 400 or 500 homes a year and so it’s very competitive, very fragmented, all the larger builders are there. I am not sure when we’ll in the top 10. We’d like to be in the top 10.

D.C. is another market where the land is very expensive. I think I showed in our chart, we were number 12 for 2012. We think we’ll move into the top 10, but I don’t see us moving into top five in D.C. just because it’s – you’d have to have somewhere in the range $300 plus million invested in that market to really be top five builder.

James Finnerty – Citigroup

I think we’re out of time. Thanks very much, Kevin. I appreciate it.

Kevin Hake

Thank you.

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