M/I Homes Inc (MHO) 2006 Q4 法說會逐字稿

Good afternoon. My name is Mary, and I will be your conference operator today. [OPERATOR INSTRUCTIONS] Thank you. It is now my pleasure to turn the floor over to your host, Phil Creek, CFO. Sir, you may begin your conference.

Thank you very much for joining us. Joining me on the call is Bob Schottenstein, our CEO and President. First to address Regulation Fair Disclosure, we encourage you to ask any questions regarding issues you consider material during this call because, as you know, we are prohibited from discussing significant nonpublic items with you directly.

We provided our 2007 earnings estimates in our press release and 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 risks 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 releases 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 February 2008. With that, I will turn the call over to Bob.

Thanks, Phil, and good afternoon, everyone. Thank you for joining us on the call today.

The 2006 financial results and 2007 estimates that we announced this morning clearly reflect the adverse and challenging conditions we faced and continue to face in most of our markets. As stated in our release, 2006 served as a healthy reminder of something that we have always known. And that is that home building is a cyclical business. The defensive operating strategy that we employed in most of our markets through all of last year was in our view, absolutely necessary in the face of a rapidly declining homebuild market. We right-sized our business to reflect market conditions. And in this respect I might add that that rightsizing followed staffing reductions that first began in our Midwest markets back in early 2005.

We recorded land impairment charges and write-offs of nearly $80 million and we reduced our lots owned and controlled by 27% from a year ago. Without the impairments, write-offs, and other special severance charges, we would have reported a very solid fourth quarter, and for the year, our 2006 earnings would have been third best in our Company's history. Other positives for 2006 include fourth quarter and full-year preimpairment gross margins of 23.4% and 25.4% respectively, operating margins for the fourth quarter and full year exclusive of impairments of 13% and 11.9% respectively. We continued the successful implementation of our geographic diversification with nearly 60% of our closings occurring in our Florida and mid-Atlantic regions, and we continue to see improvement in our Charlotte operation and in our Raleigh operation.

As we begin 2007, one of the questions we are asked most is are things improving? Has the market hit bottom. In this regard, there is really nothing I can tell you all that you don't already know. The only thing we really know is that despite all of the different views expressed by many smart and well-informed people as to where we are in the cycle, no one really knows for sure. From a planning standpoint, and this is clearly reflected in the closings and earnings guidance we provided today, we are expecting market conditions in 2007 to remain challenging throughout the year. Having said that, we sold over 290 homes just in the month of January that just closed, that just finished. That's our best sales month since March of last year and our cancellation rate for January appears to have dropped considerably and the more normal range of 22%.

So what does this mean? Frankly, we think it's way too early to tell whether the January bump is seasonal or a real trend. At this point, we don't feel that we've seen enough to change our views about 2007. And as I said, we expect 2007 to be a challenging year. At the same time in the face of those challenges, we are very excited about our business. We strongly believe this is a time of unique opportunity. We are focused on a number of initiatives which should further distinguish M/I Homes and improve our company.

Our financial position is strong. Shareholder's equity stands at a record $617 million. And in spite of the market conditions that we're now in, we are very well positioned. Our current estimates are that we will deliver approximately 3,000 homes in 2007 with earnings ranging from $0.50 to $1 per diluted share.

Before I turn things back over to Phil, I just want to take a few minutes to briefly discuss our various regions. First, the Midwest region. It continues to be very challenging, due largely to lackluster employment growth and continued excess inventory. At this time, our gross margins on new orders in the Midwest are between 15 and 18%.

Florida. Our Florida region -- in our Florida region, I should say, the market softened significantly during the third and fourth quarters from a sales perspective. We began experiencing very high cancellation rates during the latter part of last year, but the good news was we delivered over 500 homes in Florida during the fourth quarter. Homes delivered for the year were up 25% from 2005. Our Tampa operation had a record year in terms of closings and profits and we also had a very strong profit year in Orlando and Palm Beach. In 2005, we closed over 1250 homes in Florida and nearly 1600 in 2006. This year, those numbers will drop, where we expect to deliver approximately 1,000 homes in Florida in 2007, in view of the fact that we're entering the year with a significantly lower backlog. And gross margins in Florida have weakened as well, today standing at about 20% or perhaps slightly lower.

Finally, the mid-Atlantic region. New contracts for this region increased 5% in the fourth quarter. Our closings increased approximately 10% in the fourth quarter and for the year compared to 2005. It's important to note, however, that the entire increase was attributable to a very strong improvement in our Charlotte, North Carolina, market, as Washington, D.C., deliveries were down due to the well-documented tough market conditions there and our Raleigh operation was also down largely as a result of delays in community openings.

We think the Raleigh market is still in pretty good shape. The housing fundamentals in our Charlotte markets are currently the strongest in our company, our Raleigh operation is growing as we open new communities, and D.C., as I said, continues to be a very choppy market. Although I just read this morning from a January 23 Metro Study Report that the research now indicates that housing inventories in D.C. have declined for the fourth straight quarter. They're still higher than they need to be, but they're trending in the right direction and the job growth prospects in D.C. also remain quite bright.

Our margins, gross margins, that is, on new orders continue to improve in the Carolinas and currently stand in the 20 to 23% range. In D.C., our gross margins are well below 20%. With that, I'll turn it over to Phil to review our financial performance.

Thanks, Bob. As we reported, new contracts were 2,825 for the twelve months ended '06, and they were 35% below last year. . On a quarterly basis, our first quarter last year was up 5%. I want to remind you that January of '06 was a record January for us. Our second quarter of '06 was down 35%. Our third quarter new orders were down 51%, and our fourth quarter was down 61%.

For the quarter, traffic decreased 3% and the can rate was 63%. As far as the monthly details for the fourth quarter, our sales were down 50% in October, while traffic was down 8%. Sales were down 70% in November with traffic down 7%. And our sales were down 65% in December with traffic up 9%. Gross new contracts were down 23% in the quarter. Our active communities increased from 150 a year ago to 163 today. We peaked in 2006 at September 30th with 170 communities.

Today's breakdown by region is 83 in the Midwest, 46 in Florida, and 34 in the mid-Atlantic. At the beginning of last year, we planned for 190 communities by year end, but we pared that back in response to market conditions. Our current projections for 2007 is to be in 170 communities by year end, broken down by region as 80 in the Midwest, 50 in Florida, and 40 in the mid-Atlantic. Homes delivered in '06's fourth quarter reached 1363, declining 16% when compared with '05's record, 1616, and for the 12 months ended '06, homes delivered were 4,109, slightly below last yea's 4,291. As expected, the mix of our closings shifted, as 56 of our deliveries were in Florida and the Mid-Atlantic market in 2007, versus 44% in '05. We delivered 54% of our backlog in the fourth quarter compared with 46% in '05's fourth quarter. We were very pleased with our fourth quarter '06 deliveries.

Revenue in the fourth quarter declined 5% when compared to '05, primarily due to the 16% decline in homes delivered, which was offset by an average sale price increase to $328,000. And revenue for the year increased slightly due to the 5% increase in average sale price to $313,000 from $298. As reflected in our press release, during the quarter we impaired certain of our communities, including a couple of our joint venture investment by $68.9 million and wrote off another $3 million of deposits and pre-acquisition costs for land and lot deals we no longer intend to pursue. For the year, these amounts totalled $71.8 million for impairments and $7 million for land and lot deals. In total, the charges were about 7% of our net book value.

About 55% of the impairments and write-offs related to our mid-Atlantic region, primarily Washington, D.C., about 30% of the costs were in our Midwest region, and the remaining 15% in our Florida region. We impaired approximately 50 communities, encompassing both open communities and communities to be developed. The impairment as a percentage of preimpairment value was approximately 20%. In our impairment calculation, we used discount rates ranging from 12 to 15%, depending on the nature of the community and other assumptions used in the cash flow projection by community. The majority of what we impaired was finished lots.

Our gross margin, exclusive of impairment charges, remains solid at 23.4% for the quarter, as did our operating margins, which were 12.4% before the impact of the impairment, abandonment, and severance charges. And for the12 months ended '06, gross and operating margins exclusive of the same charges were 25.4 and 11.9% respectfully. Our margin strength was largely due to our strategy not to significantly discount our strong communities and to get our backlogs closed. At year end, we estimate our gross margins in backlog to be approximately 20%.

Land sales gross profit was $6.3 million in '06's fourth quarter compared to $2.6 million in last year's fourth quarter. And for the 12 months ended '06, land sales gross profit was $9.1 million versus $7.3 million last year. Land gross profit was around 21% for the quarter versus 16% a year ago and was 19% year-to-date compared to 17% in '05. We currently have $22 million of land held for sale on our balance sheet, about 1$5 million of this total is currently under contract, and we estimate that our our 2007 land sale profits will be similar to 2006 levels.

G&A costs were 5.9% and 7.6% of revenue in '06's fourth quarter and the full year. Total G&A costs for the year increased from $81 million to $103 million. The increase for the year is primarily attributable to $7 million of severance and separation costs related to workforce reductions. About $4 million increase in deposit and preacquisition cost write-off, $3.3 million of higher costs related to our investment in land, such as real estate taxes; and $3.1 million of equity compensation, which was not subject to being expensed in '05. G&A as a percent of revenue part as severance cost and abandonments was 5.2 for the quarter, which was less than last year's 5.4, and was 6.5 for the year.

Selling expenses for the quarter and 12 months ended '06 increased to 40 and 70 basis points respectively to 5.8% and 6.9%. And from a dollar perspective, selling expenses for the year increased $9.6 million, primarily as a result of co-op expenses, a $3.1 million increase in advertising and media costs, and a $4.6 million increase in community costs as a result of the increase in our community count during the year. Overall our SG&A expenses increased to 11.7% of revenue in the fourth quarter, and increased to 14.5% of revenue for '06. In '05, these percentages were 10.8 for the fourth quarter and 12.2 for the year. And excluding abandonment and severance charges, SG&A as a percent of revenue for the year was 13.6.

We continued to work on reducing our expenses and have had additional workforce reductions in January. Our head counts peaked at 1150 employees in 2005's fourth quarter. We currently employee about 900 people, we are down over 20%. Operating income in the fourth quarter of '06 was a negative 2.8 of revenue and for the 12 months ending '06 was 5.6 of revenue compared to 14.2 for the fourth quarter of '05 and 13% for the 12 months of '05. And exclusive of the $73.1 million and $85.8 million of impairment, abandonments and severance charges for the quarter and year, operating margins were 12.4 and 11.9.

Interest expense decreased $119,000 for the fourth quarter but increased $2.1 million for the year compared to the same periods in '05. The decrease in the fourth quarter was primarily due to a $4.3 million increase in capitalized interest as we had more inventory under development when compared to the fourth quarter of '05. This decrease was offset by an increase in weighted average borrowings from $508 million in '05 to $694 million in '06. Additionally, our quarterly weighted average borrow rate increased to 7.4 from 6.8 a year ago. We had $35.2 million in capitalized interest on our balance sheet at 12/31/06 compared to $19.2 million at 12/31/05. This amount represents about 2% of our assets.

Our effective income tax rate for the fourth quarter and 12 months was 41.2 and 35.3, respectfully compared to 38% and 37.6 for the same periods in '05. Our effective tax rate for '06, which again was 35.3, reflects results from our state taxable income, clarification of the manufacturing credit available, a change in the state of Ohio income tax from one that is income-based to one that is based on gross receipts, which is above the operating income line rather than in the income tax line. In 2007's first quarter, we are required to adopt financial interpretation number 48, accounting for uncertainty in income taxes. We have not completed our evaluation of the impact of this interpretation, but do not expect it to have a material impact.

For the fourth quarter, we incurred a net loss of $11 million, down from '05's record fourth quarter net income last year of 41.3 and net income for the year decreased 61% to $38.9 million. As discussed throughout this call, quarterly and annual results were negatively impacted by the $45.9 million and $53.9 million on an after-tax basis of the charges we've discussed. And for the fourth quarter, we had a diluted loss per share of $0.78 and for the year, we earned $2.74 per diluted share. These diluted charges include 326 and 381 for the impact of the previously-mentioned charges and for the 12 months ended and $0.03 and $0.13 per share for the expensing of equity compensation for the quarter and the year. And without these charges and equity compensation impact, diluted EPS would have been $6.68 per share, a 4% decline when compared to last year's record of $6.93. In addition, these results, after excluding the impact of fourth quarter charges would have been $5.99 are share, which would have been above our third quarter estimated range of between $5.25 and $5.75 per share.

M/I Financial, which includes our title operations, our mortgage and title operations pretax income decreased from $5.2 million in '05's fourth quarter to $4.7 million in the same period this year, of '06, rather. The change was primarily the result in an 18% of loans originated from 11/02/05 to 9/08/'06. The decrease in loans originated was partially offset by higher loan amounts and a change in product mix. Loan to value on our first mortgages for the year was 81% in '06 compared to 87% in '05 and for the year, 91% of our loans were conventional with 9% being FHA/VA. This compares to 86% and 14% for '05 same period.

The FHA maximum mortgage limits in the market we work in range from 200 ,000 in Florida, Indiana, and North Carolina, to $363,000 in Virginia and Maryland, and approximately 29% of our fourth quarter closings were adjustable rate mortgages. This compares to 45% in the fourth quarter of '05. And 28% of our first, 30% of our second, 31% of our third, and 34% of our fourth quarter '06 applications were adjustable rate mortgages. Of mortgages closed by M/I Financial during the quarter, 14% were interest-only loans, and this compares to 11% in '06's third quarter. Overall, our average total mortgage amount was $263,000 in '06's fourth quarter. The average borrower credit score of mortgaged originated by M/I Financial was 733 in the fourth quarter of '06 compared to 732 in '06's third quarter. And these scores compare to 716 in '05's fourth quarter and 718 in '05's third quarter.

The percentage of customers that received down payment assistance in the fourth quarter was 6%, the same as '05, and in the fourth quarter the average mortgage balance on these down payment assisted originations was $179,000 compared to 175 in '05. . We sell our mortgages along with their servicing rights and our contingent repurchase obligation due to loan delinquency is primarily limited to the first couple of payments being made timely. And in 2006, we did not repurchase any loans. Our mortgage operation captured about 78% of our business in the fourth quarter compared to '05's 86%. We believe there will be continued pressure on our capture rate due to increased competition. We continue to put programs in place that we believe will help our capture rate and overall our mortgage and title business produced about 21% of our operating income in '06 compared to about 11% in '05.

Next, as far as the balance sheet summary. During last quarter's conference call, we discussed how we apply a regular and comprehensive process in evaluating our asset values, identifying any impaired assets, and assessing the recoverability of these assets. This process is based on information we received from routinely scheduled division land calls, our constant visits and discussions with our local management teams, and quarterly formal -- quarterly division reviews. During these meetings, division and corporate management review the performance and valuation of each asset. And our process of evaluating underperforming assets is categorized as land and lot deposits and pre-ac costs, wholly owned inventory, and investments in joint ventures.

First, as far as land and lot deposits and preacquisition costs, during the fourth quarter, an additional $3 million of deposits letter of credit and pre-ac costs were written off for a total of $7 million for the year. This represented approximately 4600 lots. The breakdown of this 7 million by region is 3.7 in the Midwest, 2.7 million in Florida, and 600,000 in the mid-Atlantic. This write-off compares to a total of 2.9 million in '05. As far as wholly owned inventory, for the fourth quarter of '06, we recorded pretax impairment charges of $67.4 million in addition to the $1.9 million in the third quarter, the breakdown by region is $21 million in the Midwest, $7 million in Florida, and $41 million in the mid-Atlantic.

In joint ventures during the fourth quarter of '06, we impaired two of our joint ventures for a total of $2.4 million and none of our three joint ventures that have outside financing were impaired. As you are probably aware, these evaluations require the use of assumptions that may change based on market conditions and management's intention with respect to assets. Homebuilding inventories at 12/31/06 increased $180 million, a 10% increase over the balance at 12/31/05. Compared to a year ago, raw land decreased 24%. Land under development decreased 6%, and finished, unsold lots increased 73%. At 12/31/06, we had $228 million of raw land, $212 million of land under development, and $333 million of finished, unsold lots.

Our total unsold land investment at 12/31/06 is $773 million, which compares to $718 million at 12/31/05. The market breakdown of our $773 million of unsold land is $248 million in the Midwest, $305 million in Florida, and $220 million in the mid-Atlantic region. In the fourth quarter we purchased $8 million of land. Our estimate for 2007 land acquisition is approximately $25 million compared to $164 million we purchased in '06, and the majority of the estimated 2007 land purchases are planned for our Carolina market.

At December 31 '06, we controlled 22,432 lots. That breaks down between owned of 19,386, and we controlled an additional 3,046. This compares to prior-year and total controlled at 30,574, which was owned 19,374 and we controlled an additional 11,200. Our peak owned lots were 21,318 at March 31, '06, and our current level represents a 9% decrease. The December 31 '06 mix of lots owned are 39% to Midwest, 46% Florida, and 15% mid-Atlantic. And all numbers include our prorated share of joint ventures and exclude lots under contract to sell to third parties.

We have approximately $10 million at risk in deposits, LCs and pre-ac costs at 12/31/06, which covers our 3,046 lots under control. And as you know, we have not done any land banking transactions. At 12/31/06, we had $50 million invested in joint ventures with approximately $32 million of this being in Florida. These JVs are for land acquisition and development purposes and are with homebuilding partners. Three of these joint ventures have third-party financing and are conservative leveraged with approximately 55% debt and 45% partner's equity.

At the end of the quarter, we had $131 million invested in specs, 394 units of which were completed and 323 in various stages of construction for a total of 717 specs. This translates into about four specs per community. Of these 717 specs, 252 of were in the Midwest, 325 are in Florida, and 140 are in the mid-Atlantic. At the end of the third quarter, we had $107 million in specs, 204 completed, 459 in various stages of construction for a total of 663. Our current view is that our spec levels will continue to be about four per community based on current market conditions continuing.

At December 31 '06, there was $410 million outstanding under our revolving credit facility as compared to $260 million at 12/31/05. Last October we extended the term of our revolving credit facility. This facility now matures in October of 2010 and is led by our longstanding banking partners, JPMorgan Chase and Wachovia. We're currently borrowing about $360 million and expect to peak for the year at the end of the first quarter at around $400 million with the balance declining throughout 2007 to about $250 million by the end of '07. This means that our borrowings in '07 are expected to decrease by about $160 million.

During the fourth quarter of '06, we generated cash flow from our operations of approximately $80 million. Our bank debt was $491 million at 9/30/06 and $410 million at 12/31/06. As I stated earlier, we are borrowing $360 million today. We are very focused our cash flows and borrowing level. Long-term debt at 12/31/06 totalled $645 million compared to $512 million at 12/31/05. This amount includes $200 million of public finger notes that mature in 2012 with a fix rate of 6 7/8. Home building net debt to equity was 95% at 12/31/06 versus 77% a year ago. Homebuilding net debt to cap was 46% versus 40% a year ago. We expect the net debt to cap ratio to improve in '07, especially in the second half of the year. We always focus on our debt cap ratio and our goal is to be 50% or lower. Note that we have netted our quarter-end cash balances with debt in our calculations.

Our interest coverage for the quarter was strong at 3.9 times EBITDA. EBITDA for the quarter was $68.6 million. Interest incurred for the quarter was $12.8 million compared to $8.6 million in '05's fourth quarter. And EBITDA for the year was $176.5 million compared to $186.2 million in '05. Interest incurred was $45.2 million in '06 compared to $26.3 million in '05. Currently, interest coverage is the most restrictive covenant of our bank facility. Under this covenant we are required to maintain on a rolling fourth quarter basis coverage of two times EBITDA. Based on our current estimates, we believe we will make this requirement through the end of the third quarter of '07. There is a possibility, however, of falling slightly below this level in the fourth quarter of '07. We monitor this and other covenant requirements closely and will pursue certain actions should this situation appear probable as we move through 2007.

At 12/31/06, equity was $617 million with a book value per share of $44. We did not repurchase any treasury shares during the last half of '06. At year end, we had 3.7 million shares in treasury at an average price of $20 per share. In '06, we repurchased $18 million of stock. While share repurchases may be a sound use of our capital at current prices, which are approximately 80% of current book value, we will continue to be very thoughtful about future buybacks so as not to undermine our balance sheet and our credit quality. We review our share repurchase program at our quarterly board meetings can currently have about $7 million of repurchase authority.

In summary, as we have stated, we believe that challenging market conditions will continue this year. We will know a lot more about the state of our industry in a couple of months as the spring selling season comes in. For 2007 we are currently estimating diluted earnings per share range of $0.50 to $1 per share. This range is based on projected deliveries of approximately 3,000 homes at an average sell price of $315,000 and no significant option deposit write-offs or impairments. Projected deliveries by quarter are estimated to be 600 homes in the first quarter, 650 in the second, 825 in the third, and 925 in the fourth. By region, the estimated closings for '07 are 1200 in the Midwest, 1,000 in Florida, and 800 in the mid-Atlantic. And we will update our 2007 estimates as we release quarterly earnings this year as we have in the past. This completes our presentation. We will now open the call for questions and comments.

[OPERATOR INSTRUCTIONS] Thank you. Our first question comes from Alex Barron from J.M.P. Securities. Please go ahead.

Yes. Thank you very much. First of all, I think you guys ought to be highly commended for the level of disclosure you give. I don't think anybody comes close.

Thanks, Alex.

Thanks a lot.

I guess my question was, you guys mentioned you impaired 50 communities and some were not really delivering homes yet. Just wondering what the breakdown was of actually active versus nonactive communities?

Alex, when you look at the communities we impaired, the big majority of them are in communities where the lots are finished and the communities are open. There are only a couple of communities that are not finished lots that are open right now. So very few.

Virtually all access communities where we're selling now.

Okay, great. Thank you. I don't know if you mentioned it or I missed it, but you gave the gross margins for Midwest. What were they for Florida and D.C.?

Florida is right around 20%, and in the mid-Atlantic region, Charlotte and Raleigh are in the 20 to 23% range, and D.C. we have a little bit of volatility, depending upon the location, but on average probably somewhere around 15, 16, 17%.

And we're talking about new orders today, Alex.

Oh, okay. Got it.

Yes. We did say at 12/31/06 the approximate margin in the backlog is 20.

Okay. I was just trying to understand at what point impairments are triggered. Obviously your Florida region seems to be fairly challenged in terms of orders, but I guess your margins are still apparently hanging in there, whereas your D.C., you're still getting orders, but it looks like your margins are not. So it's more driven by the margins as opposed to the sales pace?

That and plus the fact that during the latter part of the fourth quarter we had an extraordinary number of closings in Florida and we were delicately balancing the reduction of sales prices, which is also reduction of gross margin against homes that would close at higher margins. You never know whether you've made the right decision until you get to a point of hindsight. In hindsight, I think what we did was correct given the tremendous number of homes we closed in the fourth quarter in Florida. So I think that -- I think one of the impacts of that was that it, on a forward basis it affected our fourth quarter sales in Florida. Now that we've gotten that behind us, we'll be able to get a better tail on the tape on the pace of sales in Florida.

Just from a numbers standpoint, Alex, pretty much the way it works out is it, if you're selling at a 10% margin or less from a gross standpoint, thinking everything subdivision is a little different, you get into having to model it and make certain assumption, that may trigger an impairment. But our margins in Florida have been pretty decent on new orders.

Okay. Is that just because land prices never rose much, or is it because house prices still relatively high to your cost there?

Actually, no. Prices did go up significantly in Florida. Our margins today are down over 1,000 basis points from where they were a year ago. So it declined precipitously.

Of course, we were at 30% for --

Right. They've dropped. In terms of absolute basis point drop, they've dropped the most in Florida.

Okay. Lastly, so you impaired about 50 communities this quarter. How many were there last quarter, just a couple or something?

Yes, just a couple. When you look at the breakdown of what we did in the fourth, there were 31 in the Midwest, 6 in Florida, and 11 in the mid-Atlantic. And just a couple in the third quarter, Alex.

And they were in the Midwest, I guess?

I think there was one in the Midwest and maybe --

We can double check that.

Maybe one in Florida. Just a couple, Alex.

Thanks. I'll get back in the queue. Appreciate it, guys.

Thanks a lot.

Our next question comes from Timothy Jones from Wasserman and Associates. Please go ahead.

Hi, Phil.

Hi, Tim.

A couple questions. I agree with the nice breakdown of the operations. You said that you sold 290 homes this month, which was the best since March with the 22 cancellations. Were those gross orders or were they net orders?

It's Bob Schottenstein. Those 290 sales were net of the 22% cancellations.

They were net of it?

Yes.

Give me the number for January a year ago were, please?

January a year ago was a record for us, Tim, we sold 357.

And those are net numbers, those are apples to apples.

What was the cancellation rate at that year?

January a year ago, Tim?

We'll have to check that.

January a year ago was, I'll flip to it while I know you have another question.

You think so, huh? You've basically a 7-year supply land. Your option land, based on 3000 units is a year, in-line of most builders, but your 15-years of owned land, some are trying to get down low as two or three years. If you can double or triple what most builders have. What are your strategy on that?

First of all, knowing how -- knowing why ours might be a little bit more out of balance with others is a direct result of the fact that we've always been a builder who at least up until now has developed a very large percentage of the ground that we sold our houses on. And so a year ago today before the markets, particularly Florida and D.C. really begin to turn, on a call like this we were developing around 80 to 85% of our own ground. As a result, that meant we would own more. On a go forward basis, our strategy would be to get it down and we've taken steps to that, but it's a process.

Tim, also to get back. January of last year's can rate was 25%.

You're the first one to give that number, so I appreciate it.

Also. A little more flavor on those owned lots and so forth, one of the things we do feel good about is December of '05, we owned about 8700 lots in the Midwest and today we own about 7400.

That's right. Our Midwest owned lots have declined in excess of 15%.

That's good news. Florida is up from a year ago and so is the mid-Atlantic. Of course, we've worked the off the books lots down from 11,000 to 3,000 in four quarters and we only have $10 million at risk on the 3,000 off the books. So our biggest challenge is definitely things that are on the books. But this year, if we do deliver approximately 3,000 homes and then we also talked about land purchases being estimated at $25 million --

Which is very small.

-- and if you break down the $25 million, that's probably about 500 . We would need to do 2500 lots or so. And if you look at our average lot, about 60 to 65,000, we'll do about 150, $175 million in investment.

And you said you were going to pay down $160 million of debt this year; is that correct?

That's our current plans, yes.

Okay. I'm a little confused on why you might trigger the EBITDA coverage in the fourth quarter given the fact that that's your highest quarter for deliveries?

The issue you get into, Tim, is when you look at the guidance that we are given, which is $0.50 to $1 for the year, obviously that's a lot lower amount of income than we've had in the past. We do expect interest incurred to come down in '07, that's for sure. But the issue is that when you get to the fourth quarter of '07 -- the fourth quarter of '06 rolls off. So the fourth quarter of '06, where we produced a lot of EBITDA is not in the calculation. If we have a good spring selling season or we get investment levels down more, we may not have an issue in the fourth quarter of '07. We know we won't have an issue until then because we have the fourth quarter of '06 in the calculation. It just depends on the spring selling season and how everything goes, Tim.

Can I restate that and say that may be quite conservative because most of your competitors are expecting a pickup in the spring selling season?

We hope we're being conservative. We're conservative in every way, except politically.

I love it. I'm from Ohio, too. Last one, you talked about the -- I probably know the answer, but we talked in the past about you might going into new markets. I would say that's off the table right now?

Well, I don't know that it's off the table but we don't have anything to -- it would not be appropriate for us to say anything, because there's nothing definitive at this point.

Thank you so much.

I don't know it's off the table, but all these issues, and you've touched on a number of them with balance sheet management and so forth all converge as we look at this issue. When we say we're excited about our company, we are, and we want to grow, but we're going to grow smartly and part of that growth is going to come from the resurgence of our business in the markets that we're in. But to be sure, at some point, we will be looking at new markets.

One last thing. I'm sorry to take up so much time. Most builders march with substantially lower -- you said that was really a slowdown. Some builders are suggesting that they could have up orders because of a basically flattish growth orders by a decline in cancellations. Is that possible for you this quarter?

We think our backlog is good at 12/31 because of --

Is it possible for our sales comps for the first quarter to be up?

Well, we had a very good first quarter last year. We talked about our sales being up 5% last year in the first quarter and we sold 1100 homes last year in the first quarter.

It would be quite -- we're not anticipating our sales for the first quarter to be ahead of last year at this point.

Yes. We look at our sales last year on a quarterly basis, we sold 1100 the first quarter, 750 the second quarter, 575 the third, and 350 the fourth.

Obviously we're expecting our comps to strengthen as we move through the year. We'll know more here in a few months as we really figure out or try to understand what the hell is going on.

I understand, but you could have orders up for the year, but not the first quarter?

We are hopeful of that.

Yes. Thank you so much.

Thanks, Tim. Thanks so much. Next question.

Our next question comes from Ivy Zelman from Credit Suisse. Please go ahead.

It's actually Dennis on Friday. Thanks again for all the clarity and detail that you guys gave. I just wanted to understand the 290 you talked about in January from an order perspective, could you possibly talk about Midwest, Florida, the Carolinas, and D.C. as far as trend-wise what you're seeing within January?

Well, we're optimistic about all of them, Dennis. Of course one month did not -- a quarter--

Are you asking for a breakdown by region?

What I guess I'm trying to understand if there's variance within your regions where you saw -- because obviously it's a positive trend. And I'm trying to get a sense if there's any particular region where --

Not really. We were above our internal estimates for all three of our regions, so everything actually looks pretty decent for January. Again, we need a couple more real strong months.

If you were to look year-over-year, are you positive in any region in January?

I'm not positive for the month because obviously last January was very good. It looks like I probably was positive in the mid-Atlantic for sure. Florida was pretty decent. Looks like it was about the same. And the Midwest looks like it was down a little bit. But last January -- or last January we had very strong sales in the Midwest. So it looks like right now just the preliminary numbers. Mid-Atlantic was up, Florida was kind of a push, and Midwest was down a little bit.

Okay. So it sounds like the cancellation problem you had in the fourth quarter in Florida, you rooted out most of that?

Looks like it for now. We'll know more in a few days as we find out whether this is a trend or an aberration.

Looking at those orders in January, are you to the point where you're able to sell to be built homes versus spec homes?

Well, as you look at the breakdown of the 290 round figures, there was about 130 specs sold. So to answer your question, we did sell more to be builts.

And that's a better mix than the fourth quarter?

Yes. Should be a little better margin, too. We just want to make sure we keep them in the backlog and get them closed.

Okay. Lastly, trying to understand all of this in perspective with what you're going with -- sorry, with price and incentives. Are you needing to incentivize the buyer more to draw the traffic out, or are your prices stable with where you ended the year?

Well, we're obviously getting a little more competitive because if you look at our backlog, our backlog was 350 and the estimate we gave for the full year was 316.

And frankly some of the impairments we took now that pricing -- that pricing went into affect instantly effective with the finalization of the decisions to impair. So that's better pricing in the market.

Yes. Keep in mind, Dennis, we talked about, we impaired the land about a 20% basis and the average lots about 65. That's about 13 grand premarked up. So say in general, the impairments probably bring our prices down from 15 to 20 right there.

Okay. Would it be a fair statement to say that pricing has yet to find a floor?

I don't know. That's certainly fair. I don't know if it's true.

Okay.

It depends on the subdivision, it depends on the market. It's still very, very competitive.

Without trying to be flip, I go back to when I said before. No one really knows.

Think about it this way, not asking you to look forward, but as lf yet, prices have continued to trend down at least through January relative to where you were?

I think that's absolutely accurate.

Okay. Just lastly, I'm sorry if you guys mentioned this in the numbers, but did you give what the average incentive was during the quarter?

We really did not. Most of what we do is a reduction of price. So when you look at us, our prices are still coming down. So you've really just got to look more at the average sale price than anything, Dennis.

Okay. Just realizing we have to battle the mix issue, if you were to think about incentives plus price, what would that discount be year-over-year?

Well, the best way to look at that is gross margins.

My average sale price and backlog at 9/30 was 365, was 350 at 12/31. I was down $15,000 right there just in average sale price and backlog.

Okay.

And we talked about how the margins have dropped from last year at this time too.

Every subdivision is a little bit different. That's the way we look at it.

Okay. Well, thanks again, guys.

Thanks a lot.

Our next question comes from Joel Locker from FTN Security.

Hi, guys. I just wanted to say a good job on the balance sheet, bringing that debt to cap down a little bit. It's one of the things that was a little concerning going into year end. But anyway, just wanted to actually see what the -- what your assets were, just deposits on the balance sheet. I was trying to look, as in customers putting down deposits for homes?

Hasn't changed a whole lot. We continue to be about 3 to 4%, Joel, as far as customer deposits.

What line item is that in on the balance sheet?

It's actually separated. I'm not sure offhand it was in the press release or not, but we can call you afterwards and give it to you.

Right. Just going forward -- what do you estimate in ASP -- you gave the unit deliveries quarter by quarter, but do you have any kind of ASP per quarter for closings?

No, I didn't give anything like that. Just the number for the year.

And the number for the year?

315.

315.

315. All right, thanks a lot.

Thank you, Joel.

[OPERATOR INSTRUCTIONS]

That sounds like it's it. Are there any more questions?

We have another question from Paul Nouri from Sidoti and Company.

Hi, good afternoon.

Hey, Paul.

Did the guidance include any potential land write-downs, or was it independent of that?

Nothing significant.

In other words, we're assuming that there's nothing significant and that would be net of any.

So you took the brunt of your land write-downs -- or we hope you took the brunt of your land write-downs this past quarter?

Yes.

And I guess on a broader basis economically, is there any change in the Midwest? Is there any fundamental reason to think that these things would bottom this year there?

Hopefully. You can look at a lot of things. There's still a lot of existing homes on the market, but they are declining. There's still more than they were a year ago, but they're less than they were two to three months ago. The biggest concern in the Midwest, which probably starts in Detroit, not to blame it, but is the lack of job growth and the problems that continue to be set forth in GM, which ripple down into Ohio and Indiana. There are a number of major employers in Ohio and Indiana -- of course we have operations in Columbus, Cincinnati, and Indianapolis who are either direct or indirect suppliers to Ford and GM.

That's been yet an additional quick kick in the ankle. I would like to think they've bottomed out. The markets are down considerably. They're off nearly 50% from their peak in terms of permits in Columbus and in Cincinnati. Not quite so far in Indianapolis. So we'd like to think they've bottomed out.

Do you think the local governments would step in and incentivize big business to come back into the region? Has there been any talk of that?

Yes. There's a lot of initiatives like that within the state of Ohio and time will tell whether they will be successful.

Okay. Thanks a lot.

Thank you.

We have a follow-up question from Joel Locker from FTN Security.

Just a quick housekeeping. The specs were 717 at the end of the quarter how many of those were finished.

At the end of the quarter, 394 were completed and 323 under construction for a total of 717. Back on the customer deposit number was $19 million.

19 million?

19 million.

Alrighty. Thanks a lot.

Gentleman, there appear to be no more questions at this time.

Thank you very much for joining us and we look forward to speaking to you at the end of the first quarter.

Thank you, everyone. This concludes today's conference call. You may now disconnect, and please have a wonderful day.