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Executives

Phil Creek – EVP and CFO

Bob Schottenstein – Chairman, President and CEO

Paul Rosen – President, Mortgage Company

Kevin Hake – SVP

Analysts

Michael Rehaut – JPMorgan

Ivy Zelman – Zelman & Associates

Joel Locker – FBN Security

Alex Barron – Housing Research

M/I Homes Inc. (MHO) Q4 2013 Earnings Call January 29, 2014 4:00 PM ET

Operator

Good afternoon. My name is Stephanie and I will be your conference operator today. At this time, I would like to welcome everyone to the M/I Homes Year-End Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. (Operator Instructions)

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

Phil Creek

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

First, to address regulation 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, we want to remind everyone that the cautionary language about forward-looking statements contained in today’s press release also applies to any comments made during this call. Also, be advised that the company undertakes no obligation to update any forward-looking statements made during this call.

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

Bob Schottenstein

Thanks a lot Phil. Good afternoon and thank you for joining our call to review our 2013 fourth quarter as well as 2013 year end results. 2013 was a very good year for M/I Homes as we reported significant improvement in our operating results. Total revenues for 2013 exceeded $1 billion representing a 36% increase over 2012. Our pre-tax income of $41.3 million for the year was more than double our pre-tax income from last year and our fourth quarter pre-tax profit of slightly more than $15 million represented a very significant increase over last year’s fourth quarter.

Our new contracts homes delivered and backlog sales value each improved by more than 25% over 2012’s levels with each reaching a five year high. More specifically new contracts increased 18% for the fourth quarter and for the year we sold nearly 3800 homes which is I said was a 25% increase over 2012. Our average sale price also increased resulting at a 44% increase in the value of our sales backlog compared with the year earlier. Our average sale price in backlog at the end of the year stands stood at $319,000 a home.

Well our results were aided by improving housing market conditions, they also reflect and I wanted to score this, they also reflect our success in strategically shifting and diversifying our geographic footprint. In 2013, we gained market share nearly every one of our markets as we opened 65 new communities and increased our community count by 20% from year ago. Our financial services segment M/I Financial also recorded very strong performance in 2013.

And with that, I’ll take a few moments to take about our three regions, first the Midwest region. We had 400 deliveries in the fourth quarter 1237 homes closed for the year which represents 36% of our total. Deliveries increased 26% in the Midwest region for the fourth quarter compared to the last year while new contracts in this region were up 31% for the quarter. Sales backlog was up 50% from the start of the year in dollar value and we increased our controlled lot position in the Midwest by over 1000 lots or about 22% from a year ago. We ended the quarter with 70 active communities in the Midwest, a 15% increase from December of last year. We had a particularly strong year in both Chicago and Indianapolis.

Our southern region is comprised of Florida and Texas and represents our fastest growing region. Our Texas expansion is going very well and is clearly beginning to contribute to our growth. We have also seen significant improvement both of our Florida markets Orlando and Tampa and are receiving solid results there. We continue to grow our land position and communities in Orlando and Tampa. We deliver 388 homes of a southern region for the quarter, 39% increase over last year representing 35% of our total volume.

The dollar value of our sales backlog was up 44% from a year ago and we increased our controlled lot in our southern – controlled lot position in the southern region by more than 3900 lots. This is an increase of nearly 80% from a year ago. We had 50 communities in the southern region at the end of the quarter, this is a 35% increase from last year.

And I’ll now talk about our Mid-Atlantic region. In the Mid-Atlantic region, our new contracts were up 33% for the quarter compared with 2012 and our backlog value was up 35% from a year earlier. We delivered 332 homes in the Mid-Atlantic region for the quarter which was a 15% increase over last year and for the year delivered 1053 homes in the Mid-Atlantic region. Our Washington DC and Charlotte markets all had very strong years and we are opening new communities to continue to grow our positions in each of these three markets. We ended the quarter with 37 active communities up about 12% from last year and increased our controlled lot position in our three Mid-Atlantic markets by 14% over a year ago.

Before turning the call over to Phil, let me just say and we begin 2014 with a very strong backlog a solid balance sheet and a very good land position. We controlled 40% more lots than we did a year ago and we feel very good about where these lots were located. We ended 2013 with cash balance of $143 million, shareholders’ equity of $493 million, no borrowings under our $200 million credit facility and a net debt to net capital ratio of 39%. We remain optimistic about our business, look forward with anticipation to the spring selling season and we’ll continue to focus on increasing our profitability and growing our market share.

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

Phil Creek

Thanks Bob. As far as financial results, our new contracts for the fourth quarter increased 18% to 793 and our traffic for the quarter was up 7%. And our fourth quarter 2012 sales were up 33%. So, our 2013 improvement was of a pretty tough comparable. Our sales were up 20% in October up 37% in November and down 1% in December. And as to our buyer profile, 41% of our fourth quarter sales were the first time buyers, the same percentage as the third quarter. And about 50% of our fourth quarter sales were from inventory home compared to about 45% in the far three quarters.

Our active communities increased 20% from 131 at the end of December last year to 157 this year and this follows our 11% increase in community count in 2012. During the quarter, we opened 18 new communities while closing 8. And for the year we opened 65 new communities and closed 39. Our current estimate for 2014 is to increase our community count by 5% to 10% by year end opening about 75 new communities opening in the second half of 2014. We project that our southern region led by our growth in our Texas markets will be adding the most new communities in 2014.

We delivered 1120 homes in 2013’s fourth quarter delivering 70% of our backlog this quarter compared to 75% a year ago. And our average closing price for the fourth quarter was $292,000 a 7% increase over last year’s $273,000. And our backlog average sale price is $319,000. Revenue increased 34% in the fourth quarter and increased 36% for the year compared to last year as a result of both the increase in deliveries and the increase in the average closing price. In 2013, we reached over a $1 billion in revenue for the first time since 2006. In the fourth quarter, we recorded pre-tax charges of $1.6 million for asset impairments and for the 12 months of 2013 we recorded pre-tax charges of $5.8 million.

Our 2013 charges were related to legacy land assets in our Midwest region. We continue to work through these older assets. We are currently down to about 5 older Midwest communities. Our gross margin was 19.9% for the quarter up 90 basis points year-over-year excluding impairments our fourth quarter GPs were 20.4% compared to 19.6% in last year’s fourth quarter.

Land gross profit was $518,000 in 2013’s fourth quarter and for the full year $3.8 million. Our fourth quarter SG&A expenses were 14.3%, versus 15.2% a year ago. And for the year, our SG&A expense ratio improved to 130 basis points. In dollars, our SG&A expenses increased 26% in the fourth quarter compared with last year reflecting our volume increase and our community count growth as well as cost incurred in Houston and Dallas where we are not yet delivering homes and generating revenues.

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

Interest expense decreased slightly for the quarter and the year. Interest incurred, increased by $435,000, our rate of capitalization increased due to higher land development activity when compared to a year ago. We generated $27 million of EBITDA for the quarter and covered interest 3.4 times for the year with $89 million of EBITDA for the year. We have $14 million in capitalized interest on our balance sheet compared to $15 million a year ago about 1% of our total assets. Our earnings per diluted share for the quarter was $0.48 per share, this per share amount reflects $1.2 million of dividends to our preferred shareholders.

Now, Paul Rosen will address our Mortgage Company results.

Paul Rosen

Thanks, Phil. Our mortgage and title operations pre-tax income decrease from $3.5 million in the 2012’s fourth quarter to $2 million in the same period of 2013. Our fourth quarter results include an increase in loans originated from 691 to 815 in higher average loan amounts, but were offset by lower margins on loans sold. A continued shift in the product mix from FHA to conventional and less revenue from servicing value of loans on which we retained servicing when compared to 2012’s same period.

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

Overall, our average mortgage amounts increased 3% from $246,000 in 2013’s fourth quarter, compared to $240,000 in 2012’s fourth quarter. The average borrower credit score on mortgages originated by M/I Financial was 736 in the fourth quarter of 2013, compared to 734 in 2013’s third quarter. Our mortgage operation captured approximately 84% of our business in the fourth quarter, compared to 2012’s, 83%.

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

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

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

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

Phil Creek

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

Our land investment at 12/31/13 is $339 million, a 32% increase compared to $256 million a year ago. At December 31st we had a $180 million of raw land and land under development and a $159 million of finished unsold lots. We owned 3040 unsold finished lots with an average cost of $52,000 per lot and this average lot cost is 16% of our 319,000 backlog average sale price. The market breakdown of our $339 million of unsold land is a $117 million in the Midwest, a $134 million in the South and $88 million in the Mid-Atlantic.

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

During 2013’s fourth quarter, we spent $60 million on land purchases and $39 million on land development for a total of $99 million. And for 2013, we spent $324 million on land purchases and land development. And as to our 2013 land purchases, about 50% of the purchased amount was raw land.

Our estimate today for 2014 land purchase and development spending is $400 million to $500 million. And at the end of the quarter, we had a $123 million at inventory homes, 321 homes that were completed and 477 under construction. This translates into about 5.1 homes per community. And of the 798 total inventory homes, 287 are in the Midwest, 288 are in the Southern region and 223 are in the Mid-Atlantic. At December 31, 2012 we had 649 inventory homes with an investment of $90 million which was about 5.0 homes per community. We believe we are positioned well with our inventory home levels.

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

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

Question-and-Answer Session

Operator

(Operator instructions). Your first question comes from the line of Michael Rehaut with JPMorgan.

Michael Rehaut – JPMorgan

Thanks. Good afternoon everyone.

Bob Schottenstein

Good afternoon, Michael.

Michael Rehaut – JPMorgan

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

Bob Schottenstein

Well, that’s a great question. We had pretty robust community count growth last year. We – as I said in my comments we’re going to continue to focus on growing our business. And as Phil mentioned in his we’re looking at 5% to 10% community count growth this year with most of the backloaded. I think that there has been a delay in getting certain communities open not just ones that we might we developing but also developed by others. It’s sort of the nature of the business with housing conditions improving and shortages of workers and so forth.

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

Michael Rehaut – JPMorgan

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

Phil Creek

Yeah, Mike. As far as the sales pace, if you actually look at our last five years October tends to be the best month of the quarter, November tends to be second and December tends to be the worst. If you look at our comparables of 2012, we actually had a pretty strong December last year and I talked about in our fourth quarter last year being up 33%. So, we were looking at pretty tough comparables. Having said that, which is the normal seasonality December was the weaker of the four months. We sold 292 in October, 276 in November, 225 in December. So, we still had a pretty decent December, I think there was just seasonality in last year was just really strong.

Michael Rehaut – JPMorgan

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

Phil Creek

We ended up with average sale priced in backlog of being up about 9%, December of 2013 to December of 2012. If you look at the average sale price in backlog by quarter, at the end of the first quarter we were 290, at the end of second quarter of last year we were at 293, then we went to 304, then we went to 319. You’d always get into some product and mix for example we have opened a couple of sub division to particular at a higher price points, there is always the mix issues. From a pricing standpoint, I would say the cost side is not been as erratic and it has been, although there is still certain issues depending on the market certain markets, in Texas for instance in certain markets our selectable times has still moved up a little bit. Bob mentioned little bit hard in certain places to find really good substance suppliers. But I will say overall our incentives definitely did not go up in the fourth quarter.

Bob Schottenstein

And I’ll just add is to the slight – just slight bit more to that. Broadly speaking we think that demand for housing remains good and that as I said we look forward to with optimism to the spring selling season which is probably starting as we speak. Obviously there is some challenges currently in a number of the markets around the country which just incredibly cold and difficult weather. But that all said, we don’t think that it’s – if I can use the term [shelve] demand that anyway. And if you look at things with more of a longer arc I do think that there is room to continue to push prices and enhance margins. And that’s something that we managed week to week and months to month on a sub division and market by market basis.

Michael Rehaut – JPMorgan

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

Bob Schottenstein

Thank you so much.

Operator

Your next question comes from the line of Ivy Zelman with Zelman & Associates.

Ivy Zelman – Zelman & Associates

Good afternoon guys. Thanks for taking my questions. I have a few but let me try to be a little shorter than normal if I can – will see how I behave. But first, Bob as you – there’s about…

Bob Schottenstein

Just be yourself.

Ivy Zelman – Zelman & Associates

Well you’re thinking about the land that you acquired in terms of incremental lots that you talked about land spend and lot of that being raw ground. Would you give us a sense of when you’re underwriting spends purchasing those lots, what type of gross margin you’re underwriting to, is it in line with the gross margins?

Bob Schottenstein

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

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

Ivy Zelman – Zelman & Associates

Can you talk about positive that the…

Bob Schottenstein

And I don’t know if you want to add – I don’t know – excuse me like I don’t know if you want to add anything to that Phil. Okay.

Ivy Zelman – Zelman & Associates

I was just hoping Bob, that you can give us more of a sense on incentive internal rate return and think about more on the gross margins given what you’re reporting gross margins, you’re definitely historically in a range but you’re at the lower end of your peer group and recognizing the concern in the markets that have been brought up by many outlets, is that margins are going to contract as builders are spending more money on land, labor and materials. So, can you give us your confidence in what your underwriting that your trajectory of gross margin will be upward. And you do you feel confident that the lands you’re buying will give you the opportunity to expand margins. So, you don’t like to put a number around and maybe to actually if you’re not talked about it.

Bob Schottenstein

I’m not going to put a number but I’ll say a couple of things. In terms of our new communities and there been quite a few of them over the last couple of years. We feel very good about their performance, we feel very good about the margins they’re giving. Our margins are improving and as I mentioned in response for the previous question, we think that they can continue to improve. One thing to keep in mind is that although it’s much less of an issue than it once was, we entered into this recovery with most of our legacy land in markets that have gotten better but maybe delayed in the Midwest. But that have gotten maybe as better as some of the other areas of the country that have improved at a much more rapid and pace. When you look at our operations outside the Midwest and even in our newest Midwest markets Chicago, we think our margins there very favorably with the other builders if not better.

Ivy Zelman – Zelman & Associates

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

Bob Schottenstein

Let me say one thing first and just because I want to say this and let Phil or Paul Rosen answer the question.

Ivy Zelman – Zelman & Associates

You, yourself Bob.

Bob Schottenstein

Keep in mind. Yeah, thanks. Keep in mind that 65% of our business and it’s an increasing percentage is now outside the Midwest and that’s a radical change from just a few years ago and it’s not that I mean that’s just a fact. So, Phil, if you want to?

Phil Creek

Well, I think I was been committed as always I mean when we participate in the entry level buyers, it tends to be more in the upper part of those entry level buyers. We’d never been a 150, 175 average sale priced looking in certain credit constraint type buyers. You could see from the backlog breakdown in the Midwest our average sale price in backlog is over $300,000. So, when you start looking at the credit profile of those people it’s not the typical people buying those lower price entry level houses. I’ll let Paul talk for second about what we’re seeing as far as any credit issues or whatever but…

Ivy Zelman – Zelman & Associates

But Phil that buyer is a first time home buyer that they’re spending more and they’re up a full length more a higher-end consumer that can – but it’s still their first home, correct? And that’s always been the case for you? So, you’re saying it’s an overall change?

Phil Creek

It – I mean that’s a – it’s a – you actually when you look at it as what section of the markets you’re playing in. I mean if you’re in Mason, Ohio outside of Cincinnati as oppose to on another side of Cincinnati. Again it depends on that submarkets you’re after what their buyer profile really is.

Paul Rosen

Phil, I would just add that the main issue we face with our first time home buyer is the ability to accumulate the down payment, that’s more of an issue than a credit or an income issue to us. And in those cases we still look for the FHA programs just 3.5% down but also very popular right now, our conventional programs with 5% down, that do allow a 100% gift. So, if you – you can get gift from a family member. So, we are not struggling with our first time home buyers being able to get them into a home.

Bob Schottenstein

The only other thing I will say is I think if one of the points is that a lot less of the so called millennials are buying and most of them are renting, I happen to agree with that, there is no – and I don’t think that’s even – I think that’s pretty clear at most markets. It’s one of the reason the apartment business is so robust. That said, we grew our sales 25% last year and we’re confident that we can achieve our growth goals this year with the compliment of communities and buyer profile better attracted to our homes.

Ivy Zelman – Zelman & Associates

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

Phil Creek

Ivy, we don’t make specific projections like that. I mean if you look at 2012, we were at 15.6, 2013 we were 14.3 pretty significant. When you look at the fourth quarter, it was almost a 100 basis points better, expenses went down or went up quite a bit less than like revenue did. We will be delivering our first homes in Houston starting in the fourth quarter. Also, if you look at…

Bob Schottenstein

You’re starting with the first quarter.

Phil Creek

I’m sorry Houston in the first quarter, Houston and San Antonio are hit quite a bit more scale. So, again as Bob said, we continue to have significant growth goals. We are focused on improving our returns in our profitability. But as far as any type of specific projections, we don’t make that those type of numbers.

Ivy Zelman – Zelman & Associates

Okay guys, great. Thank you.

Bob Schottenstein

Thanks, Ivy.

Ivy Zelman – Zelman & Associates

Best wishes for 2014. Thank you.

Bob Schottenstein

Thanks a lot.

Operator

Your next question comes from the line of Joel Locker with FBN Security.

Joel Locker – FBN Security

Hi, guys.

Bob Schottenstein

Hi.

Joel Locker – FBN Security

Just I guess the follow up on the G&A side a bit. And I know it went up around $8.8 million sequentially. And just maybe if you had a breakdown of what was maybe year-end stock comp versus just increased G&A or headcount or what not just to kind of get a better feel for what’s should be to pulling that?

Phil Creek

Joel, this is Phil. Our headcount went up about 25%. And again when you look at our revenues growth and our unit growth, it was in line with [indiscernible]. We did have higher incentive due to our operating income going from $14 million to $47 million. So, we did have some higher incentive payments obviously but we don’t breakout any of those type numbers.

Joel Locker – FBN Security

Great. And if you’re looking at – looking at your financial service income everybody has gotten squeezed on that play where all the builders and but it’s – you went for about 1.5% of homebuilding revenues the income from financial services in I think 2012 and 2013 versus the fourth quarter was 0.7% or something along those lines. And what do you see – do you see that as the run rate? And so just looking I know it bounced from quarter-to-quarter but just if you look at 2014, is that a better way to model it?

Phil Creek

Yeah, thanks. Again I mean the first half especially or some unusual market conditions and Paul and his team did a great job to take an advantage of that. When you got to the third and fourth quarter even though volume was up on the origination side profitability was down. As far as it’s the second half and the fourth quarter a more applicable run rate, the answer is yes.

Joel Locker – FBN Security

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

Phil Creek

Yeah, Joel what then really was in our Tampa and Orlando business has been very strong. We have been in the fourth quarter a year ago to have a couple of really strong communities in our Florida operations. And even though our sales were still strong [base to base ] weren’t quite as good. Just had a couple of very unusual communities in that fourth quarter a year ago in Florida.

Joel Locker – FBN Security

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

Bob Schottenstein

Thanks.

Operator

(Operator instructions). Your next question comes from the line of Alex Barron with Housing Research.

Alex Barron – Housing Research

Hey, good afternoon guys.

Bob Schottenstein

Hey, Alex.

Alex Barron – Housing Research

I hope you’re well. So, wanted to ask you a little bit about your financing side. Are you guys seeing any kind of maybe it’s too early with the changes in the rules so but are you seeing any kind of shift where people are no longer favoring FHA loans and trying to get conventional instead because they don’t want to keep the PMI forever?

Phil Creek

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

Alex Barron – Housing Research

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

Phil Creek

Let’s see. Well the…

Bob Schottenstein

Address the qualified mortgage first.

Phil Creek

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

Alex Barron – Housing Research

I agree. And any comments, I’m not sure if I missed at any comments so far in the month of January in your outlook for those spring selling season?

Bob Schottenstein

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

Alex Barron – Housing Research

And last – and can you guys quantify how much of the SG&A this quarter was attributable to the opening of Dallas and Houston?

Phil Creek

No, we don’t break that type of [indiscernible] Alex.

Alex Barron – Housing Research

Okay. Thanks.

Bob Schottenstein

Thanks.

Operator

Your next question is from the line of Joel Locker with FBN Security.

Joel Locker – FBN Security

Hi, guys. Just coming back to the community count, I know you guys had given guidance of about 25% so it came about 7 short and you guys mentioned some there is some delays in community count but if you look at those that maybe should have been opened by now or what not? Is that – would you kind of guide it towards flat up single – low single-digits if you’d open those or got those opened in the fourth quarter?

Phil Creek

Well, Joel again they’re waiting. The answer for that was we would increase it by about 25% we ended up at 20%. It was a combination, we did sell through a few more center than we thought. Also, there were a few for a different reasons didn’t get open, it is a more harder to predict, right now we’re buying about 50% raw land. So, there is land development involved et cetera. But again, we still feel really good about the 20% growth which was on top of double-digit growth the year before and again open to be 5% to 10% this year, open about 75 communities this year. So, still a significant amount of growth.

Joel Locker – FBN Security

Right. Just, I guessed on your preferred equity, that’s a – it’s a pretty high interest rate especially when you consider it’s post – post-tax. I was wondering if you would think about taken more than out or maybe all of it with credit facility, if you don’t want to use your cash and just in doing an interest rate arbitress?

Kevin Hake

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

Joel Locker – FBN Security

Right. Just a last question on overall kind of gross margins where if you look back to 2002 where you had like a kind of a 23% homebuilding gross margin versus I think your 20.2 currently. Do you think a lot to get back to that level is that – is it just a different model now or you had more Texas which is generally a lower gross margin kind of high inventory return area that might ended you from getting back up to that 23% gross margin.

Kevin Hake

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

Joel Locker – FBN Security

All right. All right. Thanks a lot, guys.

Operator

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

Phil Creek

Thank you very much for joining us.

Operator

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

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