M/I Homes Inc (MHO) 2005 Q3 法說會逐字稿

Good afternoon ladies and gentlemen. At this time, I would like to welcome everyone to your M/I Homes Third Quarter Earnings Conference Call. [OPERATOR INSTRUCTIONS.] It is now my pleasure to turn the floor over to your host, Mr. Phil Creek, Chief Financial Officer. Sir, you may begin your conference.

Before we start, you are very, very choppy. So we’re just a little concerned that the call is not coming over real clear.

Can everybody hear okay, you think? Okay, we’ll start then. Welcome. Thank you for joining us at our third quarter conference call. Joining me today is Bob Schottenstein, our CEO and President, and Steven Schottenstein, our Chief Operating Officer.

First, to address regulation fair disclosure, as usual, we encourage you to ask any questions regarding issues that you consider material during this call because, as you know, we are prohibited from discussing significant non-public items with you directly. And, as usual, we provided our earnings guidance for 2005 in our press release.

As to forward-looking statements, this presentation includes forward-looking statements, as characterized in the Private Securities Litigation Reform Act of 1995. Any statements that are not historical in nature are forward-looking statements that involve risk and uncertainties, that could cause actual results to differ materially from those in the forward-looking statements.

Please refer to our most recent 10-K, 10-Q, and earnings press release for other factors that could cause results to differ. Be advised that the Company undertakes no obligation to update any forward-looking statements made during this call, the audio of which will be available on our website through October of 2006.

It should also be noted that certain information related to the use of non-GAAP financial measures, required by SEC Regulation G, is posted on our website. This information can be accessed by logging onto the M/I Homes website at MIHomes.com, then clicking on the investor relations section of the site, and selecting non-GAAP financial information reconciliation. Now I will turn the call over to Bob.

Thanks Phil, and good afternoon everyone. We are very happy to report that M/I Homes had a record setting third quarter. And, as a result, we remain very optimistic that 2005 will be M/I Homes’ tenth consecutive record year. Despite closings being down from 2004’s third quarter, and below our expectations, due in large part to delays in Florida, we nonetheless delivered record financial results on the strength of average selling price and continued very strong gross and operating margins.

We are pleased to see that the strategy we set out to deliver over 18 months ago, which involved the repositioning of our geographic footprint, is now bearing fruit. As you may recall, this strategy was intended to result in a homes delivered mix, whereby approximately 40-45% of our closings would occur in the state of Florida, 35-40% in the Midwest, and the balance from our North Carolina and Washington, D.C. operations.

The results for new contracts and backlog this quarter are a strong indication of the success of that strategy. With regard to new contracts, we are pleased to report that we had a record quarter, with 20% improvement over 2004’s comparable period. In Florida, we had a very strong quarter, with new contracts up 37%, and likewise we experienced strong demand in our North Carolina and Washington markets, where new contracts increased by 67%.

The increases in these markets more than offset continued softness in the Midwest, where new contracts declined 4%. We achieved record high backlog of 3,522 homes, comprising an average selling price of $323,000 per home, yielding a total sales value of $1.1 billion.

We have also taken further steps to diversify our land position. As we have purchased approximately $250 million worth of ground this year, with over 80% of that ground being located in our three Florida, two North Carolina and Washington, D.C. markets. We anticipate for the year that we will purchase an additional $120 million for a total of approximately $370 million of ground for calendar year 2005.

During the quarter, we also significantly improved our community count, with new communities increasing from 127 at the beginning of the quarter to 140 by quarter’s end, comparing to 130 open communities a year ago. For the balance of the year, we anticipate that 10 additional new communities will be open, such that at year end we will have a minimum of 150 active open communities.

We fully expect our 2005 record results in growth to be achieved in the second half of the year, due in part because of our lower community count going into the year, and the softness which we have experienced throughout the year in our three Midwestern markets. With delays in Florida, we now anticipate that we will close slightly below 4,300 homes for 2005, which is below 2004 levels.

That being said, we still believe our strong fourth quarter closings average sale price and margins will, as I said at the outset, result in our tenth consecutive record year. And, as we stated in the press release this morning, we reaffirm our guidance of $6.75 to $6.95 of earnings per share.

In addition, we have provided guidance for calendar year 2006, which we fully expect to be our eleventh consecutive record year, with closings or deliveries exceeding 5,000 homes, and diluted earnings per share growing by a minimum of 10%.

Before I get into specific market by market discussion, I wanted to give just sort of a macro view of how we see things. Overall, in recent weeks, it’s been somewhat well documented that material prices have increased, and we have seen additional costing pressures as a result of the price of oil and the cost increases associated with petroleum based raw materials, and of course now the continuation of the hurricanes in Florida.

We’re working hard with our subcontractors and suppliers to minimize this impact, especially in our backlog. We do not, at this point, believe that the impact will have a material effect on our margins.

With respect to the market conditions in our three Midwestern markets, Columbus, Cincinnati and Indianapolis, we continue to see difficult conditions. We’re very focused on producing the best possible results in these challenging markets, and in terms of our growth goals for calendar year 2005 and calendar year 2006, we are not expecting any improvement in our Midwest markets.

The Columbus market appears to be slightly more challenged from our standpoint than Cincinnati or Indianapolis. And, consistent with where we see the growth in our company occurring, less than 15% of our targeted 2005 land purchases will be in our three Midwestern markets.

Florida demand continues to be very strong, and a very positive thing for M/I Homes. Our September 30 backlog in Florida is higher than last year by more than 50%. Our community count in Florida will more than double what we had in 2004 by the end of this year. And, we are proud that we -- and pleased that we now have over 10,000 lots under control in the state of Florida.

While some national builders have referred to a slow down in the Washington, D.C. market, we feel the need to share with you that we have not seen that slow down, as our recent community openings in this market have shown very strong buyer demand, and very strong new contracts. We also continue to see improvement in our two North Carolina operations, in Charlotte and Raleigh, as better quality communities come on line for M/I Homes, and we feel very good about the focus of our management in each of these two markets.

We realize that the balance of the year poses a significant amount of hard work, and heavy lifting. But we fully expect to be successful, with plans to close approximately 1,600 homes during the fourth quarter. And we expect our sales to be very brisk as well. As I said, we’re optimistic that we will achieve these goals, be successful in reaching them, and have a record year.

Finally, before I discuss our individual markets, I did just simply want to note that during the quarter our Company was named to the Standard & Poor’s Small Cap 600 Index. We believe our inclusion in this index is a meaningful milestone for M/I Homes, and reflective of our strong financial growth and the performance of our stock.

Let me take a few minutes just to review our market by market conditions. And then I’ll turn things back over to Phil. In Columbus, Ohio, single family permits for the first half of 2005 were down 25% in the total market, compared with a year ago. For us, our third quarter new contracts were down about 20% compared to ’04. There’s no question we’ve seen a drop off. But we believe that we are outperforming the general market.

Our backlog, obviously, has decreased as a result of slower sales. We expect to deliver approximately 1,800 homes in Columbus this year, compared to 2004’s record deliveries of 2,200. And, even though our volume is down, make no mistake. We expect to have a very profitable year in Columbus, and expect to be solidly profitable in 2006, even though we expect to operate at these lower levels as we right size our operation, and right size our expenses.

The Cincinnati market for M/I, the sales for the third quarter were decent. Our backlog and sales are both down around 10% from a year ago. We expect to deliver around 275 homes in Cincinnati this year, with solid profits. That market does not appear to be off, from a macro standpoint, as much as Columbus -- perhaps off year over year by between 5% and 10%.

Indianapolis, also a challenged market, for us our sales were up approximately 30% for the quarter. But that should not be viewed as an indication of the overall strength of the market. Rather, it’s more of an indication of the opening of the somewhat -- or better performing new communities in the market.

We expect to deliver around 300 homes in Indianapolis this year, slightly above last year. We believe the total market is off between 5-10%. Overall, in the Midwest, our gross margins on new orders today continue to be in the 20-22% range, down 200-400 basis points from where they were a little over a year ago.

Our current projection, which includes, for the total Company, closing over 5,000 homes in calendar year 2006, and minimum 10% earnings growth, has embedded in it that our Midwest business will continue at current levels, and that margin levels will continue at current levels, with no real improvement over the next couple of years.

Next, our three Florida operations. First, Tampa. Our operations there continue to shine. We had a fantastic quarter in Tampa. Our sales were up over 35% for the quarter. Our sales for the year are up over 20% from ’04. Our land position is very strong.

We’re very excited about our growth prospects. We continue, I should say, to be excited about our growth prospects in Tampa. We plan to open five new communities in the fourth quarter, anticipate closing approximately 600 homes in Tampa this year, with minimum 25% growth planned for calendar year 2006.

The greater Orlando market, which includes our recent acquisition of Shamrock Homes, our business is outstanding. Margins are among the strongest in the Company. And we have a very strong land position in Orlando, and are on track to deliver an all-time record of approximately 500 homes in calendar year ’05, and with further growth to around 700 homes in ’06.

With respect to our Shamrock acquisition, I am pleased to report that the first quarter of our experience with that acquisition was better than expected, from a sales and margin standpoint. We now control approximately 1,200 lots in the Lake County sub-market, that Shamrock operates in. And while the acquisition, because of the impact of purchase accounting, will not add to our bottom line in 2005 second half, we’re very confident that the acquisition will be accretive in 2006.

West Palm Beach, our sales tripled in 2005’s third quarter compared to last year. They’re up over 45% year to date. While land continues to be difficult for all builders in the West Palm Beach or Southeast Florida market, we’re pleased with our efforts, and we expect to spend approximately $40 million on new ground and new locations in calendar year ’05.

West Palm Beach had a very slow start in closings for the first half of ’05, due primarily to permitting and utility delays. But we’ve made some progress in the third quarter, and we expect for the year to close around 150 homes, compared to 100 a year ago, with very significant growth expected in West Palm in ’06 and ’07.

In terms of an overview of Florida, our gross margins on new orders continue to be very strong, ranging from the high 20s to the mid-30s. Overall, we’re very excited about our Florida operations. In 2004, we delivered 1,000 homes in the state of Florida. This year, we expect to deliver in excess of 1,350 homes, with 2,000 deliveries expected for 2006, and approximately 2,500 deliveries expected for 2007. In 2005, over 50% of our land purchases were in our Florida markets.

Charlotte, North Carolina, our business is improving. We expect sales for 2005 to increase approximately 50% compared to ’04. We anticipate opening three new communities in the Charlotte market during the fourth quarter. Our land position is the best it’s ever been. We expect further growth in ’06, with a significant increase in Charlotte’s profitability.

Raleigh, our sales were up 30% for the quarter, and 10% for the first nine months. For the year, we anticipate closing about the same number of homes. However, Raleigh will result in significantly higher closings in ’06, and a significant increase in profitability as well.

Finally, our Washington, D.C. market, closings were up 30% for the quarter compared to a year ago. Very strong margins. We continue to see very strong buyer demand. We’re excited about our growth potential. In ’04, we closed 200 homes in D.C. This year we expect to close over 260, with close to 400 closings projected for calendar year ’06. Our margins in D.C. are very strong, in excess of 25%. And I’m happy to report that margins continue to improve, although not quite to the mid-20s, but continue to improve in the low to mid 20s in North Carolina.

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

Thanks Bob. 2005’s third quarter new contracts were 1,163, up 20% from last year, making it our best ever third quarter. For the quarter, traffic increased 17%, and the cancellation rate was 22%. And the can rate of 22, compared to 21% in last year’s third quarter, and our slightly increased rate, was Midwest related.

Our sales were up 40% in July, and traffic was up 23%. Sales were up 9% in August with traffic up 16%, and our sales were up 14% in September, and traffic was also up 14%. Our annual goal continues to be increasing new orders by approximately 15%. And, as we stated in the press release, we realize that, currently, achieving that goal this year will be very difficult.

Our community count was 140 at September 30 of ’05 versus 130 a year ago, and 127 at June 30 of ’05. We currently have 85 communities in the Midwest, 30 in Florida, and 25 in North Carolina and D.C. By year end, we expect to have around 85 in the Midwest, 35 in Florida, and 30 in North Carolina and D.C. area, for a total of 150.

Homes delivered in ‘05’s third quarter were 1,047, compared to 1,135 for ‘04’s third quarter, down 8%. While softness in the Midwest was the major reason for the decline versus prior year, our closings were lower than expected in the third quarter, primarily due to continued challenges in Florida. We are experiencing delays in permitting and utility hook ups, due to the strong demand and the hurricanes. And there also have been certain shortages, such as roof tiles and cabinets.

Homes delivered in ‘05’s first nine months were 2,675, compared to 3,103 for ‘04’s first nine months. As we’ve mentioned in previous communications, because of soft market conditions in the Midwest, and delays in getting new communities open in our growth markets, we expected 2005 to be back-ended with respect to homes delivered. And, as Bob stated, we currently estimate that we will close about 4,275 homes this year, with approximately 1,600 in this year’s fourth quarter.

Despite the 8% decline in homes delivered, revenue increased 5% in the third quarter compared to the same period in ’04. The impact from the decline in homes delivered was offset by a 15% increase in average sales price from $267,000 to $307,000 in the third quarter. And, for the nine months ended, revenue increased 2%, despite the year-end decline -- excuse me, despite the year-to-date decline in homes delivered, as a 14% improvement in average sales price and higher land revenue more than offset the decline in homes delivered.

Gross profit increased $6.8 million in the third quarter of ’05, and decreased $3.5 million for the first nine months of ’04. Margin percent increased by 80 basis points in the third quarter, and decreased 90 basis points for the first nine months of ’05, to 25.5% for the third quarter, and 25.4% for the first nine months.

Land gross profit was $2 million in 2005’s third quarter, compared to $608,000 in last year’s third quarter. And for the first nine months of 2005, land gross profit was 6.7 million, and was 3.9 million for the same period in ’04. The profit in the 2005 third quarter and year-to-date related to raw land sales related to Columbus and lot sales also in Tampa and Virginia. And land gross profit was around 22% for the quarter and year-to-date.

Our overall gross margins were 25.2 in the first quarter, and 25.5% for both the second and third quarter of the year. We currently estimate that our full year gross margin percentages will be approximately 25%, which will be about 50 basis points below 2004’s full year of 25.5%. And this expected 25% overall gross margin percentage is higher than we expected coming into the year.

Our G&A cost in ‘05’s third quarter increased $3.2 million to 6.3% of revenue, from 5.7% of revenue in the prior year quarter. And year to date, G&A costs were 6.4%, versus 5.6% for the same period of ’04. While G&A expenses have risen as a percentage of revenue for the third quarter and year to date, we do anticipate that this percentage will be more in line with 2004’s percentage by year-end, as we leverage against our strong fourth quarter closings.

The dollar increase is attributable to increases in land related expenses associated with our increased land investments, such as real estate taxes, HOA fees, and additional personnel. In addition, we have been focusing on our house designs, to ensure that we are meeting the needs of our markets, and also operating as effectively as possible. In addition, our year to date amount reflects the absence of a 2.3 million favorable mark to market adjustment in ’04 related to interest rate swap agreements that were terminated in the third quarter of ’04.

Selling expenses for the quarter and year to date as a percent of revenue increased 10 and 30 basis points, respectively, to 6.4% and 6.7%. These increases are primarily due to an increase in the number of our closings with realtor involvement. In 2005, our coop expense as a percent of revenue was 2%, versus 1.8% in ’04. Also contributing to this increase is our increased spending on models, as we get our additional new communities open.

Overall, our SG&A expense increased to 12.8% of revenue in the third quarter, and 13.1% of revenue for the first nine months of ’05, compared to 12% for the third quarter and first nine months of ’04. We do anticipate this to normalize and to decline as a percent of revenue by year-end, as we increase our closings. In 2004, our SG&A percent was 11.9%, our lowest ever. And our current estimate is that we will be slightly higher than that, in the low 12% area, in 2005.

Operating income in the third quarter of ’05 was 12.7% of revenue, and, for the first nine months of ’05 was 12.3% of revenue, compared to 12.8 for the third quarter, and 14.2 for the first nine months of ’04. The decline reflects all of the factors we previously discussed, including increased land-related costs, and timing of costs associated with our growth initiatives, and costs associated with our Midwest sales efforts.

Interest expense increased 938,000 for the third quarter, and 2.1 million for the first nine months of ’05, compared to the same periods in ’04. The increase in the third quarter was primarily due to an increase in weighted average borrowings through the third quarter, from $276 million in ’04, to $508 million in ’05. This increase was partially offset by a $2.6 million increase in capitalized interest, as we had more land under development when compared to last year.

And the weighted average borrowing rate for the quarter was 6.4%, compared to 6.5% last year. We have $18.9 million in capitalized interest on our balance sheet at 9/30/05, compared to 15.9 million at 9/30/04, and 15.3 million at 2004’s year end. The amount remains at less than 2% of our total assets.

Our effective income tax rate for the third quarter was 34.7%, and 37.3% for the first nine months of ’05, compared to 39.5% for the same periods in ’04. Our effective tax rate for the quarter reflects a change in the estimate of our ongoing effective tax rate from 39% to 38%. This change is primarily due to clarifications provided during the quarter on the manufacturing credit included within the American Jobs Creation Act of ’04.

In addition, the rate change reflects the change in state of Ohio tax from one that is income-based to one that is based on gross receipts, along with other changes in state taxes. And, for the quarter, net income was a record 25.1 million, up 11.1% from 2004’s third quarter of 22.6 million. And net income for the first nine months decreased 11.2% to 59.5 million for ’05.

Diluted earnings per share for the third quarter increased to a record $1.72 for the quarter, from $1.57 a year ago. While the comparable period of 2004 include a $0.21 charge related to the repayment of our sub-debt, we are pleased with our earnings. And diluted EPS was 4.09 for the first nine months of ’05.

M/I Financial, which includes our title operation, our mortgage and title operation’s pre-tax income decreased from 4.6 million in ‘04’s third quarter to 4.2 million in the same period in ’05. The primary reason for the change in income was a decrease of 19% in loans originated from 853 in 2004 to 692. In addition, our mortgage product mix yielded lower gain amounts.

Loan to value on our first mortgages for the third quarter was 80% in 2005, compared to 83% in ’04. And for the quarter, 87% of our loans were conventional, with 13% being FHA/VA. And this compares to 81% and 19%, respectively, for 2004 same period. The FHA maximum mortgage limits in the markets that we operate range from 172 in Florida to 313,000 in Virginia.

Also, approximately 49% of our third quarter closings were adjustable rate mortgages. And this compares to 48% in the third quarter of ’04. 26% of our third quarter ’05 applications were adjustable rate mortgages, compared to the second quarter’s 46%. And of mortgages closed during the third quarter, 31% were interest only loans. This compares to 27% in 2005 second quarter.

And overall, our average total mortgage amount was 226,000 in 2005’s third quarter. The average borrower credit score on mortgages originated by M/I Financial was 718 in the third quarter of ’05, compared to 712 in 2005’s second quarter. And these scores compared to 718 in ‘04’s third quarter and 716 in ‘04’s second quarter.

The percentage of customers that received down payment assistance in the third quarter decreased to 6% versus 7% in ’04. And, in the third quarter, the average mortgage balance on these down payment assisted originations was 176,000, compared to 172,000 in 2004. And the majority of these customers are in our Indianapolis and Columbus market, and buy our entry level product.

We sell our mortgages, along with our servicing rights. Our contingent repurchase obligation due to loan delinquency is primarily limited to the first couple of payments being made timely. And in 2005, we have not repurchased any loans. Our mortgage operation captured about 84% of our business in the third quarter, for both this year and last year. And we constantly focused on our capture rate, as M/I Financial only service M/I Homes’ customers.

And overall, our mortgage and title businesses produce 10% of our total operating income during the third quarter, and 13% year to date. And this compares to 12% and 16%, respectively, for 2004 same periods.

As far as the balance sheet, our home building inventories at 9/30/05 increased 38% over September 30 of ’04, due primarily to our backlog and our land activities. Compared to a year ago, raw land increased 16%, land under development increased 56%, and finished unsold lots increased 53%. As of 9/30/05, we had 287 million of raw land, 244 million of land under development, and 130 million of finished unsold lots. Our total unsold land investment at 9/30/05 is 661 million, which compares to 480 million at September 30 of ’04.

We constantly focus on our land investment. We plan on purchasing 375 million of land in ’05, slightly above our budgeted 360 million. Our budgeted amount of 360 million did not include anything for the acquisition of Shamrock Homes, and its land contracts, which, including the purchase price, will total around 30 million this year. The ’05 breakdown of these land investments should be 15% in Ohio and Indiana, 46% in Florida, and 39% in North Carolina and Washington, D.C.

Year to date, we have purchased 254 million of land, including the acquisition of Shamrock Homes. We owned 18,100 lots at 9/30/05, and have an additional 10,700 lots under our control. In total today, we own an approximate four year supply, and control about a six year supply, for a total under control of 28,800. This is about 2,600 more lots than we had a year ago.

The breakdown by region of our total lots under control is 13,200 in the Midwest, 10,900 in Florida, and 4,700 in Washington, D.C. and North Carolina. And, by percentages, our controlled land is now 46% Midwest, 38% Florida, and 16% North Carolina and D.C. At the end of the quarter, we had 365 specs, in various stages of construction, with 44 million of investment. This compares to 181 specs a year ago, with 20 million of investment.

Today’s levels translate into about 2-3 specs per community. And 248 of these specs are currently in the Midwest, compared to 139 a year ago. The increase in spec levels from the prior year reflects our decision to stimulate sales in older subdivisions, meet customer demand in our Midwest markets, and to build and showcase new product lines across certain of our markets. And, even with these increases, we still have one of the lowest spec levels in the industry.

At 9/30/05, there was 303 million outstanding under our revolving credit facility. We currently have a $600 million facility, which matures in 2008. And an accordion feature is also available, which could increase the capacity to 750 million. Long-term debt at 9/30/05 totaled 523 million, compared to 287 a year ago. And our home building debt to equity was 92% at 9/30/05, versus 59% a year ago. And home building debt to capital was 48% versus 37% a year ago.

We expect our home building debt to cap ratio to peak at approximately 49% in 2005’s last quarter. We focused closely on our home building debt to cap ratio. And our goal is to be less than 50%. Our interest coverage for the quarter remains strong at 7.4 times EBITDA. EBITDA for the quarter was 45.2 million. And interest incurred for the quarter was 8.1 million, compared to 4.5 million in ‘04’s third quarter.

And, at 9/30/05, shareholder’s equity was 552 million, with a book value per share of $39. We did not repurchase any stock in ‘05’s third quarter. At quarter end, we had 3.3 million shares in treasury, at an average price of $17, with approximately 15 million available to repurchase from our current Board approval.

In summary, we believe our financial performance in the third quarter was solid, and our financial position remains strong. Based on our quarter end backlog of over 1 billion, we anticipate that 2005 will be our tenth consecutive record year. And, as we have stated numerous times, due to the challenging Midwest marketing conditions, and the timing of our community openings, 2005 is a very back-ended year for us.

We fully realize the significant number of homes we need to close in the last quarter of ’05 to produce our desired results. We reiterate our previous diluted earnings per share guidance of 6.75 to 6.95 for the year, representing a 6-9% increase over 2004’s 6.35. We also expect 2006 to be our eleventh consecutive record year, closing over 5,000 homes, and reaching diluted earnings per share in excess of 7.65 a share.

This completes our formal presentation. We now will open the call for any questions or comments.

[OPERATOR INSTRUCTIONS.] Ivy Zelman with CSFB.

I guess I want to focus in on a few things that you gave some data on. You mentioned the challenging environment in Columbus. And, realizing starts are down, you said I think 25% there, can you explain why you think that market’s so weak? I mean have we seen major job losses? What’s the story there?

Great question. It’s not ever one thing. But if you were to try to say what the primary cause is, we believe that it is the result of at least four, maybe five consecutive quarters now, of negative job growth. And with negative job growth, and flat to negative household formations, we see a concomitant reduction in single family permits. I think that’s the primary reason for it. The market, at one point, was up over 10,000 starts. And it’s now peeled back to close to eight.

And, you know, you read a lot, Bob, with respect to what happened, what’s going on in that market. The Columbus dispatch has been pretty negative, with people foreclosing, and rows of houses up for foreclosure. I mean is this a market that you see stability? Or is it one where it’s just going to remain challenging? Do you see any light at the end of the tunnel?

Well yes, I think there is light at the end of the tunnel. It may be a long tunnel though. But the thing is that there’s no question that the market’s in a little bit of a hole. But we still feel very good about being in this market, and have no intentions whatsoever of hiding from it or walking away from it. And we began this quite some time ago. We have right-sized, for the most part, our expenses. We’ve had to.

Yes, that was a good point you made. What do you think -- ?

And what I was going to say was --

Sorry.

It’s true that our business is down from 2,200 plus closings to around 1,800. But it wasn’t that long ago when we celebrated the closing of 1,800 homes in this market, and bragged about our profitability. And you don’t -- whether we sell 1,800 homes in Columbus or 2,200 or 1,400, we’re going to be profitable.

No, in that regard, you’re very good at providing detail on gross margins, better than any of your peers. If you were to look at those Midwest margins that you said were ranging in the 20-22% range, down to four points, what would they look like from a peak to trough level in Columbus?

Well, I think at the peak, Columbus was 23-24%. Today it’s probably, depending upon the price point, the entry level is a little more challenged than the mid-price level. The entry level is probably around 20-21%. The more moderate priced stuff is maybe 21-22, maybe even 23, depending upon location. It’s interesting. We still have a few locations where we’re getting 24, 25, and 26% margins in Columbus.

Unfortunately, they’re not the majority of locations. But it is a subdivision business. And one of the things that I think also helps us is that we have a pretty diversified product offering here. And, as a result, in the face of a market, which certain portions of which are down even more than 25%, the average is off 25. Our business is only off about 20. But the margins have peeled back probably, on average, about 200 basis points.

And also Ivy, just a couple more points. If you looked at the average sell price and backlog in our total Columbus operation at 9/30/05, our average sell price and backlog is 305. If you look at 9/30/04, it was about 290.

So our average sale price has gone up a little bit, but not as much -- anywhere near what our other markets have been. Also, due to the size of our operation and so forth, we used to have three separate operating divisions in Columbus. And, due to the weakness and the difficulties in the market, we have consolidated those three divisions into two. We have centralized certain functions, such as costing, estimating, permitting, and some of those things. So, we’ve tried to get as efficient as we can.

In truth, even if our operating level was still at the 2,200 unit range, we probably still would have done what Phil just articulated. The slow down has given a chance, though, to really right-size it even tighter.

When you say right size, I think about operating margin by market, SG&A as a percent of revenue. What was it, and what is it roughly today now? Because that would give us a true sense of right-sizing.

Well, as Bob said, when you start looking, Ivy, at a gross margin standpoint, the numbers we give you today were kind of backwards a few years ago. The Midwest was one of our highest. But, overall, when we talk, as far as a return on sales, and our inventory turns really haven’t changed much -- they’ve come down a little bit -- our operating margins and so forth are similar to our gross margin, were down 200 to 300 basis points in those markets.

But, what had helped us is that our Florida market has gone up that much also, plus, to offset that. And that’s what we’re working on, trying to turn that ship, and get more volume in those higher growth markets.

And just one more on Columbus, and then I have a few on Florida. Just on Columbus, what percent of the base price would you say are for you and then for the market are being offered as selling incentives?

The only incentives that we’re really offering right now are on our speculative homes. And other -- there’s a fair amount of discounting going on in the market, which is different from builder to builder. I would say on average it’s probably between 5% and 10% of the retail price. For us, the only incentives that we’re really offering now, other than the fact that we just cut our margins, we’d rather just approach it head on, and say this is the price, rather than say so much off. The only incentive we’re offering is on our speculative inventory, where we’re discounting that. It varies from subdivision to subdivision.

Okay. And then just moving to Florida, obviously it’s very impressive what you’ve been able to achieve in your expansion in those markets, away from the Midwest. And obviously happy to see that you’re doing well in Florida and the Carolinas, and what you explained in D.C. But I guess I’d question your capital allocation. I think you’re one of the few builders that knows that this is a cyclical business, and you keep buying more land in Tampa.

You said you’re going to spend, I think, $40 million in West Palm on new ground. I mean doesn’t that make you nervous? I mean when you’re buying new ground right now, obviously it’s inflated, like home prices are. You have to make assumptions on how many houses per community you can sell, and at some price, over what time frame. I mean the same way we see margins under pressure now in Columbus, spending that much money on this inflated ground, why not buy back your stock at these cheap levels? At least, or balance it better.

Well, first of all, I mean that’s a great question. I think sometimes everything makes you a little bit nervous. But we have a lot of confidence in the markets that we’re in, and in the ground that we’re buying, and the price that we’re paying for that ground. Number one. Number two, we thought our stock was undervalued when it was $60 a share. So we think it’s really undervalued today, because our business is stronger now than it was when it was $60.

But, having said all that, we have authorization from our Board to buy back more stock that’s unused. And it’s something that we look at all the time. Right now, we feel confident, very confident -- I don’t think it’s unjustified -- at some point you’ve got to just decide what you’re going to, and believe in it, and do it. And that’s where we are.

And that is that we’re confident that the investment, the capital that we’re allocating in Washington, in North Carolina, and in Florida, is necessary, and also smart for us, in order to continue to grow the Company, not in an out of line, unrealistic way, but in, we think, a very steady, smart way, and to diversify our geographic footprint, like we talked about.

And also, keep in mind Ivy, as I know you do know, the ground we’re buying today is ground we’ve had under contract for a while. We’re now closing on that.

Some we’ve had under contract for over two years.

We are going to, now, as we always do, our capital allocation process for the next year and so forth. And we fully recognize, in a company our size, with a net worth of 550, that we spent like 220 on ground in ’03, we spent 270 on ground in '04. And if this year we end up about 375, it does fairly quickly leverage up your balance sheet.

And we’re fully aware that, you know, we’re the most leveraged we’ve been. Perhaps we were underleveraged before. But we are looking very, very hard at the number we are going to spend in ’06. Again, we hope to go from this year’s closing, less than 4,300, to over 5,000 next year, with additional planned growth in ’07. So, hopefully, there will be more of a balance on a go-forward basis of earnings, compared to land purchases and cash flows.

Joel Locker with Carlin Financial.

Just kind of curious about the tax rate. I know it dropped to 34.7% from 39.5%, like usual. What do you expect in the fourth quarter and in 2006?

What we anticipate using is 38% on a go forward basis. And, again, there were some changes that occurred, as far as the American Jobs Creation Act. Further clarification came out. Also, the state of Ohio changed a few things. Also, we did have the completion, Joel, of a couple of state audits. And so, with all those things, we try to always be conservative in everything, including our tax rate. And, due to all those things, we are reducing our rate to 38% on a go forward basis. And that’s something that we analyze and review every quarter.

Alright, so 38% for the fourth quarter, and maybe into ’06, is a good way to model it?

That’s the best information I have today.

Right. And I also -- just inquiring -- I saw the gross margins have been in the 23% range for the last three fourth quarters. And it just seems like you guys -- or the guidance insinuates a little higher gross margin. And I was wondering, maybe just because there's a larger mix of Florida going to be in the fourth quarter? Or is that -- ?

Yes. That is true. We do expect margins to be higher in the fourth quarter than they were a year ago. And, as Bob stated, right now, on a sales basis, our Florida margins are mid-20s to low-30s. Our D.C. margins are also very strong. And our Carolina margins are improving. So, as the mix gets that way, we do anticipate in the fourth quarter our margins being better.

Last year, in the fourth quarter, as you said, our overall gross margins were 23.6. And we do expect to be above that.

Alright. And just -- I forgot -- I didn’t catch the specs, the total specs that you guys had. I heard it was two or three a community. But just what was the overall number?

As far as the spec levels, let me just get back to my sheet here. We had 365 specs in total, the 44 million of investment. And of the 365, 248 are in the Midwest.

Right.

And, if you look a year ago, we had 181 specs, with 20 million of investment. And a year ago, 139 were in the Midwest.

Alright.

So looking at my subdivision count of 140, I’m still less than 3 per community.

Right. Alright, thanks a lot.

Thank you very much.

Thanks.

Greg Halter with Great Lakes Review.

Phil, I wondered if you could go through the community count numbers again, by region. I missed those, on where you stand and where you expect to be at year end.

From a community count standpoint, we have 140 at 9/30/05. We currently have 85 in the Midwest, 30 in Florida, and 25 in North Carolina and D.C. And, by year end, we expect to be at 150, which would be 85 in the Midwest, 35 in Florida, and 30 in D.C. and Carolina. Keep in mind, we went into this year with 125. So we knew we needed to grow our community count by 20% plus. And, so far, we’re on target to do that.

And does that new contract figure, the 5,000, does that factor in another hefty increase in community count in ’06?

The 5,000 number we’re talking about exceeding actually is deliveries Greg. And we do have an annual target of increasing our new orders by 15%. Our preliminary look at ’06 is that we will have further increases. And, again, the preliminary numbers I’ve seen for next year are ending the year at the 165 to 170 range. But again, that’s preliminary information.

Right. Okay. And of the 85 in the Midwest, how many of those are close to being completed, where you may have 5 or 10 lots left, and it’s kind of masking what’s really there?

Well, remember, the 85 number we give you is always a net number of open communities. But there’s always communities opening and communities closing out. Kind of what we see at the end of the year, we went in with the same number of communities pretty much we’re ending up with. And we do not see that community count increasing much, even next year.

Okay.

It may decrease slightly. That’s hard to -- we’d have to really check that and provide you with that information.

But we just provide you with a net number anyway.

Okay. And you talked about the average selling price in backlog in Columbus. Do you have those figures for the other regions -- Florida and Washington and North Carolina?

Sure. At 9/30/05, Florida was 318. Last year it was 272. North Carolina and D.C. at 9/30/05 was 472. And a year ago it was 438. So, total Company, at 9/30/05, the average sale price was 323. And a year ago it was 292.

And the Midwest was, in total? I know you just had Columbus.

The Midwest was 284 at 9/30/05 versus 272 a year ago. What brings that down is Indianapolis, which is our most affordable market. Indianapolis happens to be 185, which is about the same it was a year ago. That’s what brings the Midwest down Greg.

And finally, looking at your guidance, the annual guidance, it basically means you’re looking at a 265 to 285 for the fourth quarter. And I know you’ve laid out how you expect to get there on the gross profit side, and SG&A and tax rate and so forth. I'm just trying to gauge your confidence or feel for the likelihood of that number being met. If you could just elaborate on that a little further. I know you already have.

Well, I don’t know what words we could use other than [inaudible]. I mean if we didn’t feel confident, we wouldn’t be able to say that.

Okay. Thank you.

Mike Kender with Citigroup.

Most of my questions have been answered. One follow-up on the specs number that you gave, the 365. Is that finished specs? Or is that total?

No. That’s just the total units, at various stages of construction. If you actually take the 365 in specs that we have, the total dollar amount of the 365 was 44 million. So the 44 million, divided by 365, is an average of like 120.

Right.

And again, keep in mind our average sale price in backlog is like 320. So the average spec is less than 50% complete. In general, we have very, very few finished specs.

Okay. Just wanted to make sure on that. The second question was on land purchases. You threw out the number for ’05. What about ’06? Do you have a rough ballpark for that?

Well, not at this time. I don’t think we’d have to -- we’re not in a position we can confidently give you that number, in terms of a number of the deals. We’re looking at different ways to structure them. And I just don’t think we’re in a position where we can really give any.

We’ve run through different scenarios, Mike. And obviously the first thing we look at is what is under contract right now, that’s scheduled to close. That’s one number. Of course we know that. So, if you look today, what’s under contract that’s scheduled to close, is about 200. Now again, all those deals won’t necessarily make. Then also, we look at not only the market strength. But we also look at debt to cap and leverage and those type things.

And the other things we look at is, as you know, one of the things a little different about us is we’ve pretty much done all of our business on our books, wholly owned. We only have a couple of JVs off the books. And we don’t land bank anything. And, in some of these bigger markets, the Tampas and the D.C.s and the Orlandos, it is more common for people to partner, from a JV standpoint or whatever, with these transactions. And we are looking at a couple of those.

But, it’s something that we’re looking at very closely, and will provide that number when we release fourth quarter numbers.

Yes. Mike, right now it would probably be premature. And it might even be misleading to try to put a number out. You know what our growth projections are.

Right.

And you know what kind of land we control. And we’re very cognizant of smartly balancing, smartly managing, I should say, our balance sheet. So, someplace within the intercept of all of those initiatives, we’ll be shortly providing that number.

And also, keep in mind, when we look at the 18,000 lots we currently own, versus 16,800 at the end of the second quarter, the Shamrock acquisition on July 1 brought us about 1,200. So right there, that put me at 18,000. And, of course, we are working very hard on getting our run rate up. And we hope to get to the 5,000-6,000 run rate. That will also change those numbers.

Okay. And then the last question is, Hurricane Wilma, I assume you had minimal impact. I mean it looked like it went south of where you guys operate. Just wanted to double-check on that.

We hope that you’re right. We’re not certain that you’re right. We’re quite certain that our Tampa and Orlando operations had minimal, if any impact. Not quite so sure as it relates to our operations in Palm Beach. I don’t think there was anything significant. But it may have been more than minimal. And we just don’t know the answer to that at this point. We’re trying to assess it as we speak.

Okay. And how many communities do you have in West Palm right now?

In Palm Beach today, we have about four communities open. As we said, we delivered 100 homes there last year. We expect to deliver about 150 this year. But again, that was before the Hurricane. But it’s just something, with very limited phone system and electric, it’s just very hard to get through all the facts yet.

And the other thing is that the information is rapidly changing. There was information this morning that suggested that as many as 600 utility workers that are generally located in the greater Tampa area are being asked to relocate to Southeast Florida, to assist with hook-ups. If that were to happen, and if that has, and if that’s a protracted situation, then that could impact Tampa. But we just don’t know the answer to that.

Okay. That’s all I had. Thank you.

[OPERATOR INSTRUCTIONS.] [Gabriel Kim] with Basswood Partners.

I just wanted to pick up on your commentary on peak trough margins in the Columbus market. So peak was like 23-24%, and today you’re operating at 20-22%. Can you just sort of fill in the detail? So when I think about what’s going to bring that down, sort of lower prices and incentives are going to bring that down. Right sizing the organization is going to bring it up. And then, presumably, you have some inevitable land cost escalation coming through. So, could you just sort of quantify, roughly, what those relative impacts were?

[Gabe], I think the way we look at it is, as Bob said, our plans are -- hopefully it will be better -- but we’re kind of planning for our volume levels not to change significantly. Right now, our interest carry is a little higher than we hope it will be in the future, because we have -- you know, as you know, we expense interest when the land is raw. We expense interest when the lots are developed.

So, hopefully, as we buy less land, get land through our system, hopefully our interest carry will improve some, hopefully, from an expense standpoint, by right-sizing the business. Unfortunately, we had to lay some people off. Hopefully that will work its way through the system. We don’t believe that margins will deteriorate significantly more.

We’re going to assume that they’ve bottomed out somewhat, and that current demand levels will remain where they are.

We kind of think our bottom line return on sales net operating margins are pretty much going to stay the same now from where they are. One thing also you should keep in mind, the backlog at 9/30 in the Midwest is down about 150 units, which is 10% from a year ago. So we’ve been kind of going through this downward spiral for the last few quarters. And we’ve been working on it very hard as we’ve gone through the process.

Okay. So I appreciate the forward commentary. But I was really just sort of wondering, historically, when you sort of look at the peak margins in Columbus, which were 200 basis points higher than present levels, what was sort of the contribution of higher incentives, to bring that down? What was the offsetting benefit of right sizing the organization? And what was sort of the contribution of higher land cost to that overall margin number? Is that something that you can talk about?

When we talk about everything being off, 200 basis points or so, that kind of went from the gross margin line to the bottom line.

Okay.

So the margins have come down a couple of hundred basis points. But, fortunately for us, the Florida and the D.C. market and also the Carolinas are improving. Those are offsetting that.

Right. Right.

And that’s how we’re getting record results.

Sure. Okay. Thanks.

[Gabe], thanks.

Sir, at this time there appear to be no further questions.

Thank you very much for joining us. And we’ll look forward to getting together again before the end of the year. Thank you.

This concludes today's M/I Homes conference call. You may now disconnect.