M/I Homes Inc (MHO) 2007 Q1 法說會逐字稿

Good afternoon. My name is Raquel, and I will be your conference operator for today. At this time, I would like to welcome everyone to the M/I Homes first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a Q&A period. [Operator instructions] Thank you. It is now my pleasure to turn the call over to your host, Phil Creek, CFO. Phil, you may begin your conference.

Thank you very much, and thank you for joining us today. With me in Columbus, Ohio, is Bob Schottenstein, our CEO and President, and Paul Rosen, President of our mortgage company.

First, to address regulations for disclosure, 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. We provided our 2007 earnings estimate in our press release.

And as to forward-looking statements, this presentation includes forward-looking statements characterized by 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 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 April of 2008.

With that, I will turn the call over to Bob.

Thanks, Phil. Good afternoon, everyone. Our first quarter results reflect the challenging macro economic conditions that we continue to face in most of our markets. As anticipated, our gross margins declined to 21.2%, from 27.3%. New contracts for the quarter declined 17% from a year ago, while homes delivered declined 15% from last year. In addition, we incurred additional impairment, abandonment and severance charges, all of which Phil will outline in greater detail in just a few minutes.

There were a number of positives during the quarter. New contracts exceeded those written in the entire second half of last year. Our cancellation rate declined from 63% in last year's fourth quarter to a more normal 25%. Our Mid-Atlantic region experienced a 66% increase in new contracts, and we were happy to complete a $100 million preferred stock offering that further strengthened our financial condition, with shareholders equity now reaching approximately $718 million.

We remain focused on a number of important initiatives as we manage through this downturn and position ourselves for the future. These include the implementation and refinement of company-wide systems and practices designed to improve and enhance the entire customer experience, a launching of a new website, and the development of new and better ways to utilize the Internet as a sales, marketing and business tool, the continued modification and development of new home designs and product offerings, and the reduction of land and expense levels.

We continue to believe that conditions will remain difficult for the balance of 2007 and probably into the early part of 2008. At the same time, we strongly believe that this is a time of unique opportunity in our industry. Now more than ever, it's all about execution. Those builders who are able to best execute and refine their basic operating practices can, and will, distinguish and differentiate themselves as we emerge from this cycle. We are very excited about our future and, despite the current down cycle, feel very good about our business.

We continue to estimate that we will deliver approximately 3,000 homes in 2007 and produce diluted EPS of $0.50 to $1.00, inclusive of the impact of the preferred stock issuance that I mentioned a few minutes ago.

Before I turn things over to Phil, let me just briefly review our regions. First, the Midwest region. Conditions there continue to be challenging, due in large part to lackluster employment growth. All three of our Midwest markets -- Columbus, Indianapolis and Cincinnati -- were down double digits in single-family permits last year. At the present time, our gross margins on new orders in the Midwest average about 15%.

Our Florida region experienced declines in new contracts during the quarter. We have seen this market soften significantly since the first half of 2006, and we continue to face a more competitive sales environment and higher cancellation percentages, particularly in our Orlando market. Homes delivered for the quarter were down 30% from prior year levels. Our Florida gross margins on new orders have weakened as we are faced with competitors and macro conditions, where volume and deep discounts seem to be the order of the day. Our current margins on new orders average about 20%.

In the Mid-Atlantic region, as I said before, new contracts during the quarter increased 66% when compared to the same period last year. We saw increases in each of our Mid-Atlantic markets -- Charlotte, Raleigh, and Greater D.C. Homes delivered during the quarter increased approximately 70% for the quarter compared to last year. Housing fundamentals in our Charlotte market are currently the strongest in our company, as this market has experienced solid increases in both population and job growth. Our Raleigh operation is also growing. We've also seen some improvement in the D.C. market this quarter, as new contracts and homes delivered increased significantly compared to last year.

In that regard, we believe that recent reductions in sale prices have stimulated our results in the market, and our cancellation rate there has declined. At the present time, our margins on new orders in the Carolinas averaged between 20 and 22%, and our gross margins on new orders in D.C. currently average around 15%.

Phil will now discuss our financial highlights.

Thanks, Bob. As we reported, new contracts of 942 for '07 second quarter were 17% below last year. However, they were higher than the entire second half of last year. The first quarter compares to a year-over-year decline in orders of 61% for the quarter and 51% in the third quarter of '06. For the quarter, traffic was approximately the same as '06, and the cancellation rate was 25%. As for the monthly details, our sales were down 18% in January, while traffic was down 10%. Sales were down 18% in February, with traffic flat. And our sales were down 15% in March, while our traffic was up 11%. Gross new contracts were down 17% in the quarter.

Our active communities increased from 155 a year ago to 161 today. We peaked in 2006 at 930 with 170 communities. Today's breakdown by region is 81 in the Midwest, 46 in Florida and 34 in the Mid-Atlantic, and our current estimate for year-end '07 is to have 169 communities, which will be 77 in the Midwest, 50 in Florida and 42 in the Mid-Atlantic.

Homes delivered in '07's first quarter were 704, declining 15% when compared to 2006's 832. We had projected about 600 closings. We delivered 46% of our backlog this quarter, compared to 30% in '06. Revenue in the first quarter declined 13% when compared to '06 record levels, primarily due to the 17% decline in homes delivered, offset slightly by an average sale price increase of 2% to $304,000.

During the quarter, we took an additional impairment charge of $1.1 million and wrote off $1 million of deposits and pre-acquisition costs. The impairment charges were primarily in our Washington, D.C. market. We continue to analyze our housing inventory and investments very closely quarterly. You may recall that we wrote off about $80 million last year. We have not factored in any additional significant inventory expense in our '07 income estimate. However, if our markets significantly change, we could record that additional expense amount.

Our gross margin percentage declined to 21.2% in the first quarter of '07, which is 600 bps lower than last year's record level of 27.3%. In 2007, gross margin percentage was negatively impacted by 50 bps from the '07 impairment charges. Conversely, the gross margin benefited by $2.4 million in the quarter, or 100 bps, from the prior impairments recorded in '06. Our estimated gross margins and backlog are about 19%, and we continue to see gross margin pressures.

Land sale gross profit was $942,000 in '07's first quarter, compared to about $150,000 in last year's first quarter. This year's land sale profit came primarily from our Tampa operations, and land gross profit was 22% for the quarter, versus 9% a year ago. We currently have 24 million of land held for sale on our balance sheet. About 21 million of this total is currently under contract, and we estimate that our '07 land sale profits will be similar to last year's levels.

G&A costs in '07's first quarter increased to $1.6 million. This increase is primarily attributable to $1.5 million of higher costs related to our investment in lands, such as real estate taxes, $1 million higher in severance costs related to workforce reductions, $900,000 increase to deposits and pre-acquisition cost write-offs with respect to abandoned transactions, and those amounts were offset in part by a reduction in payroll and payroll-related costs. G&A cost as a percent of revenue was 9.7 for the first quarter of this year, versus 7.8% for the same period last year.

Selling expenses for the quarter decreased $3 million and decreased slightly as a percent of revenue compared to the first quarter of '06. From a dollar perspective, selling expenses for the quarter decreased primarily as a result of volume decreases, reduction in advertising and media costs, and payroll-related decreases related to market conditions. Overall, our SG&A expenses decreased $1.4 million. However, as a percent of revenue, they increased to 17.7% in the first quarter of '07, compared to 15.9% in last year's first quarter. And in 2006, our SG&A percentage was 11.7% in the fourth quarter and 14.5% for the year. We continue to work on reducing these expenses. And our operating income for the first quarter of '07 was 3.5% of revenue, compared to 11.4% in the first quarter of '06.

Interest expense increased to $1.1 million for the first quarter compared to the same period of last year. The increase was primarily due to an increase in weighted average borrowings, from $532 million in '06 to $560 million as of March 31, '07. The increase is also due to the weighted average borrowing rate increasing to 7.3% from 7% a year ago.

Additionally, an increase of $270,000 is attributable to a decrease in capitalized interest, as inventory spending levels are declining. We have $37.6 million in capitalized interest on our balance sheet as of March 31st, '07, compared to $24.5 million a year ago. This is less than 3% of our total assets. We continue our policy of expensing interest when land is raw and when lots are developed. We capitalize interest when land is underdeveloped and when houses are being built.

Our effective income tax rate for the quarter was unchanged at 38%, and in this year's first quarter, we adopted financial interpretation number 48, which is accounting for a surge in income taxes, and the adoption of this interpretation had an immaterial impact on our financial condition.

For the first quarter, net income was $2.2 million, down from '06's first quarter net income of $16.4 million. Diluted earnings per share for the first quarter decreased to $0.16 a share, from $1.14 a year ago, and without the '07 charges for impairment, abandonments and severance, diluted EPS would have been $0.15 per diluted share higher in the quarter.

With that, Paul Rosen will now address our mortgage company results and some related industry factors.

Thank you, Phil. Mortgage and title operations' pre-tax income decreased from $4.1 million in 2006's first quarter to $2.6 million in the same period of 2007. The change was partly the result of an 11% decrease in the loans originated, from 521 in 2006 to 462 in 2007. Additionally, an increase in competition and financing initiatives caused an erosion of the margins.

The loan-to-value ratio on our first mortgages for the first quarter was 83% in 2007, compared to 81% in 2006's first quarter. For the quarter, 87% of our loans were conventional, with 13% being FHA/VA. This compares to 88% and 12%, respectively, for 2006's same period. The FHA maximum mortgage limits in the markets that we operate in range from 200,000 in Florida, Indiana and North Carolina to 363,000 in Virginia and Maryland.

Approximately 21% of our first quarter closings were adjustable-rate mortgages. This compares to 41% in the first quarter of 2006. 19% of our first quarter 2007 applications were adjustable rate mortgages, compared to 2006's fourth quarter of 34%. Of mortgages closed by M/I Financial during the first quarter, 22% were interest-only loans. This compares to 14% in 2006's fourth quarter. Overall, our average total mortgage amount was 286,000 in 2007. The average borrower credit score on mortgages originated by M/I Financial was 716 in the first quarter of 2007, compared to 733 in 2006's fourth quarter. The scores compare to 717 in 2006's first quarter and 716 in 2005's fourth quarter.

The percentage of customers that received down payment assistance in the first quarter was 4%, unchanged from the same period in 2006. In the first quarter, the average mortgage balance on these down payment-assisted originations was $168,000, compared to $174,000 in 2006. The majority of these customers are in our Indianapolis and Columbus markets and by our entry-level process.

We sell our mortgages along with their service [inaudible], our contingent repurchase application due to loan delinquencies primarily limited to the first couple of payments being made timely. In 2007, we have not repurchased any loans. Our mortgage operation captured about 73% of that whole business in the first quarter, compared to 2006's 76%. We believe there will be continued pressure on our capture rate due to increased competition as the mortgage business overall remains slow. We continue to put programs in place that we believe will help our capture rate.

Recently, the topic of sub-prime and alternative mortgages has received a lot of attention. We define sub-prime mortgages as conventional loans with a credit score below 620 or government loans with a credit score below 575. Alternative loans are those that do not fit into the conforming categories due to a variety of reasons, such as documentation, residency or occupancy. In the first quarter of 2007, 10% of our closings fell in the sub-prime category. Of these loans, 56% were brokered to third party mortgage companies. Approximately 17% of our first quarter closings were in the alternative category, with the majority of these being brokered. We do not have statistics on the percentage of sub-prime and alternative loans in the 27%, as we do not capture in our mortgage operations.

In light of the volatility in the sub-prime and ALV markets, we have examined our existing pipeline and the effects on new home sales. Our pipelines have been adjusted to reflect the current market conditions, resulting in minimal fallout. We feel that new home sales will not be significantly impacted. Overall, our mortgage and title businesses produced 35% of total operating income during the first quarter, compared to 14% for 2006's same period.

Now I will turn the call back over to Phil.

Thanks, Paul. As far as the balance sheet summary, homebuilding inventories at 3/31/07 decreased 54 million, or 4% below a year ago. Compared to a year ago, raw land decreased 28%, land under development decreased 43%, and finished, unsold lots increased 78%. At March 31, '07, we had 224 million of raw land, 178 million of land under development, and 343 million of finished, unsold lots. Our total unsold land investment at 3/31/07 is 745 million, which compares to 818 million a year ago.

The market breakdown of our 745 million of unsold land is 229 million in the Midwest, 305 in Florida, and 211 million in our Mid-Atlantic region. And in the first quarter, we purchased $7 million of land. Our estimate for '07 land acquisition is $25 million, compared to $164 million last year, and the majority of the expected '07 land purchases are planned for our Carolina markets.

At March 31, '07, we controlled 20,991 lots, of which we owned 18,550 and controlled an additional 2,441. This compares to prior year total controlled of 29,744. Our peak owned lots were 21,318 at March 31, '06. Our current level of 18,550 represents a 13% decrease. And the March 31, '07 mix of lots owned are 38% in the Midwest, 47% in Florida and 15% in the Mid-Atlantic. All numbers include our pro-rated share of joint ventures, and that excludes lots under contract to sell to third parties. We have approximately $11 million at risk in deposits, LCs and pre-acquisition cost at March 31, '07, which covers our lots under control, and we continue to reduce our land investment.

During the quarter, we completed a $100 million preferred stock offering that strengthened our financial condition, and our equity now stands at $718 million, with a book value of $51 per share. The net proceeds from the preferred stock offering were used to pay down bank debt. At March 31, '07, we had $51 million invested in joint ventures, with approximately $33 million of this being in Florida. These JVs are for land acquisition and development purposes and are with homebuilding partners, including Beazer, Centex and Avatar. Three of these ventures have third party financing and are conservatively leveraged, with approximately 55% debt and 45% partners' equity.

At the end of the quarter, we had $100 million invested in specs, 261 of which were completed, and 375 specs in various stages of construction, for a total of 636 specs. This translates into about four specs per community. And of the 636 specs, 270 of these units are in the Midwest, 261 are in Florida, and 105 are in the Mid-Atlantic. At the end of the fourth quarter of '06, we had $131 million invested in specs, 394 of which were completed, 323 under construction, for a total of 717 specs. So during the quarter, we reduced our investment level in specs by over 20%. Our current view is our spec levels will continue to be about four per community.

As of 3/31/07, there was $280 million outstanding under our revolving credit facility, compared to $387 million at March 31, '06 and $410 million at December 31, '06. We are currently borrowing about $270 million and expect this balance to decline throughout the year to about $125 million at the end of '07. This means that our borrowing this year will decrease by about another $150 million by year-end.

During the first quarter, we generated cash flow from operations of approximately $53 million. Long-term debt at March 31, '07 totaled $491 million, compared to $617 million at March 31, '06. This includes our $200 million of public senior notes that mature in 2012. Homebuilding net debt to equity was 65% at March 31, '07, versus 94% a year ago. Homebuilding net debt-to-cap improved to 39%, versus 47% a year ago and 44% at '06's year-end. Our targeted net debt-to-cap ratio is 50% or lower, and during these challenging times, we are focused on having a less leveraged balance sheet.

Our interest coverage for the quarter was 3.5 times EBITDA. EBITDA for the quarter was $16 million. Interest incurred for the quarter was $9.7 million, compared to $9.3 million in '06's first quarter. We currently estimate that we will be in compliance with all debt covenants at least through the end of this year. We did not repurchase any treasury shares during the first quarter. At quarter end, we had 3.6 million shares in treasury, at an average price of $20 per share. While share repurchases may be a sound use of our capital at current prices, which are approximately 50% of our current book value, we will continue to be thoughtful about future buy-backs so as not to undermine the strength of our balance sheet and our credit quality. We review our share repurchase program at our quarterly board meetings and currently have $7 million of repurchase authority.

So in summary, we continue to see challenging market conditions. As Bob mentioned, for '07, we currently reconfirm our previous diluted EPS estimate of $0.50 to $1.00 per share. This range is based on projected deliveries of approximately 3,000 homes, at an average price of about $315,000 and no significant option deposit write-offs or impairments. And these estimates could change if market conditions change.

I also want to be sure to explain the expected EPS impact of the preferred stock transaction. The dividends on the preferred stock reduce the income available to common shareholders. That is offset by the company's [inaudible] interest due to the preferred stock proceeds reducing our bank debt. Bottom line: the '07 EPS impact is estimated to be approximately $0.30 per diluted share. And as in the past, we will update our estimates for the year as we release quarterly earnings.

That now completes our formal presentation. With that, we'll open the call for questions and comments.

[Operator instructions] We'll pause for just a moment to compile the Q&A roster. Our first question comes from Paul Nouri of Sidoti & Company. Sir, you may go ahead.

Afternoon.

Hey, Paul.

You guys produced pretty good free cash flow in the quarter. Is that the kind of run rate we can expect going forward?

Paul, we actually expect things to get a little bit better as the year goes on. We expect to close more houses, especially in the second half, as we close, hopefully, at least 3,000 houses. And also, we talked about our bank lines. We expect our bank lines to go down about another $150 million between now and the end of the year. So we actually expect things to increase as the year goes on.

Okay. And I guess you had mentioned before that you guys were focused on moderating SG&A, so maybe that $41 million number can be worked on a little bit?

I'm sorry, I didn't understand that, Paul.

I'm sorry. Going forward, do you guys have initiatives in place to bring down the SG&A as a percent of sales?

We continue right-sizing our operations. We did have severance costs, unfortunately, in this quarter. We think we're probably staffed pretty much right now for delivering our estimated deliveries of 3,000, hopefully, but we continue to look at all of our expense levels to make sure we're as efficient as possible. So, yes, we are working on a lot of things, but one of the things that does impact our G&A, as we've talked about, as far as with the land we own and real estate taxes and homeowners association fees, some of those things continue until we get the land off the books.

Okay. And I guess once you build enough cash, that'll be the point where maybe you enter new regions or go to the market and buy back shares?

We'll evaluate that on a week-to-week, month-to-month basis. That's about all we can say at this point.

Okay, thank you.

Appreciate the question. Next question.

Our next question comes from Dennis McGill from Credit Suisse. Sir, you may go ahead.

Hey, guys. How are you?

Okay, Dennis.

Just to clarify on the preferred, did you have to pay any thus far in the first quarter?

We have not declared or paid any dividends yet, Dennis. That will occur in the second quarter.

Okay. And you're saying the net impact is $0.30 relative to the interest that's coming down?

The $0.30 is the estimated amount for '07.

And that's net of the interest savings.

That's right.

Yes.

We take the income away that's not available to the common shareholders for the dividends, and then you offset that by the interest savings.

Yes, I got you. And then just thinking about the liquidity, you obviously put yourself in a better position with that issuing. Can you just talk about your most restrictive covenants, those that you'd be most worried about towards the end of this year?

Well, as far as our debt covenants, Dennis, the most restrictive one is the interest coverage, which is at two times. But again, based on our current estimates, we think we will be in compliance with that through the rest of the year.

Okay. Any instance where maybe you do fall below -- maybe it's marginal or not. Have you already had discussions with the banks as far as working out any agreements should you bump up against that covenant?

We get all of our banks together twice a year, and we had our spring bank meeting a couple weeks ago and shared with them, as we always do, our outlook and our estimates. We will be getting our banks back together in the fall, and if we were to have any issues, we would deal with that then. But as of right now, we do not see anything.

Okay. And then just switching gears to the impairment. You obviously didn't have very many this quarter, and hopefully that's the trend going forward, but can you just talk about the process, particularly kind of the margin that you would be looking for in the different regions, how close you may be on some of your communities that you tested in the quarter but certainly didn't impair, and just put some parameters around how we can think about that the next couple of quarters?

Well, as you know, Dennis, last year, especially in the fourth quarter, we impaired about a third of our communities and went through everything thoroughly, as we did also the first quarter, and in general, if we get down to a gross margin of about 10%, we then start looking very closely at modeling that community. Of course, you make assumptions based on what you think current reality is and the future for sales pace margins and those type things, so we think we took a pretty good expense amount last year. We re-looked at everything the first quarter of this year. We'll continue to look at that. We did have 950 net sales the first quarter, so we'll continue to look at it, but thus far, as of the end of the first quarter, we think we're in pretty good shape. But again, that's something you look at every quarter based on market conditions.

Do you have any sense of the two-thirds that didn't face an impairment in the fourth quarter, how many of those would be in the low double-digit margin range, but bumping up against that threshold?

That's very difficult to answer.

Yes, that's a hard one to answer. We gave some color on that as far as the impairments we took in those communities, which was about a third. We impaired the land from a pre-impairment value of about 20%, and our average lot was about 65,000, so we in general impaired lots about 13,000 to 15,000, but every subdivision is a little bit different, so you've got to look at every one.

And hopefully you got a little glimpse into that by the average gross margins that we're running by region when we talked about that earlier in the call.

Right, yes, that's very helpful. And then how about the land that is held for development, that's not an open community? Has that been tested throughout as well?

The answer is yes. When we went through the quarterly review of the impairment process, you look at all of your communities. Mostly what we've impaired are subdivisions that are open and have finished lots, but did we impair some raw land, land under development communities? The answer is yes. So you look at everything.

And then just lastly, could you give us an update on how April? Kind of we heard a couple of your peers earlier today, and some weren't willing to comment. Some had said it's gotten a little bit tougher. What have you guys seen in your market?

Well, historically, we've not commented on that, and I think that's probably the approach we'll take today as well, Dennis.

Okay. Well, thanks for all the other information.

No problem.

Thanks, Dennis.

[Operator instructions] Our next question is coming from Bob Whittenhall from Royal Bank of Canada. You may go ahead.

Hey, good afternoon.

Hi, Bob.

It sounds like you're paying down a substantial amount of bank debt, and I know you're at 39% debt to total capital. You mentioned on the wide side you would finish the year at 50, but just a rough cut. It sounds like you're going to be way below that.

That's right.

I mean, are you more on the low side of the range, like 40 to 42?

Are you talking the debt-to-cap percentage at the end of the year?

Exactly.

Yes. If you look at this round's figures, Bob, again, what we talked about was that the bank debt would be down in the $125 million range, and again, assuming the earnings estimate is made and those type things, you're right, we will be in the 30 to 35% range of net debt to cap.

And just to amplify on that for a minute, if I could, Bob.

Sorry, 30 to 35?

Yes.

Yes, but I want to add something to what Phil has said. Historically, our goal has been to keep our debt-to-cap rate below 50. Given the current conditions that we're dealing with, which are quite challenging, we would strongly prefer that our debt to cap be below 40. So even though our historical goal is below 50, in times like this, the lower the better. It's heading in the right direction quite quickly and should continue on that pace throughout the year.

That's extremely helpful. I know you're giving $0.50 to $1.00 guidance.

That's right.

Do you have an EBITDA bandwidth you'd also be willing to provide?

No, that's not really anything that we've given out as an estimate or anything before.

Okay. And for your EBITDA calculation, do you get an add-back for your write-downs on deposits?

Yes, we do. Non-cash items are added back.

Okay, great. That's terrific. Thanks very much.

Thanks a lot, Bob.

Take care, guys. Bye.

You too.

Our next question is coming from Alex [Baron]. Please go ahead.

Yes. Hi, guys. How are you doing?

Okay, Alex.

Hi, Alex.

I think I missed -- I got a couple of your gross margins for Carolinas and D.C., but I hope you don't mind repeating for Florida and Midwest.

At the present time, the average gross margins in the Midwest are running around 15%, and in the Florida region, on average, they're running right around 20. Maybe a little bit below, but right around 20. And the Carolinas and D.C. and Charlotte and Raleigh on average were 20 to 22%, and in D.C. the average is very similar to the Midwest, right around 15%.

Got it. And I'm assuming the $1.1 million write-off is just one community?

No, it's actually a couple. Alex, as you go through and do write-downs and you do modeling, you go through and re-look every quarter at your assumption. But, no, I would not assume it was just one community.

Okay. I wanted to ask you, I guess, how should I think about your Florida market in terms of --? It seems like you guys kind of had a little bit of a late entry, a ramp-up into that market. It seems like in the last couple years, you bought roughly 4,500 lots. Have any of those been impaired already, or they don't qualify for a write-down yet? How does that work?

When we did impairments in the fourth quarter of last year, about $10 million of our impairments were in Florida. If you look at Florida, the concern was that we did have negative net sales in Florida the fourth quarter of last year, but that was primarily due to us delivering over 500 homes last year in the fourth quarter. Of course, the good news was our new orders the first quarter and this year in Florida did improve some. We are focused on Florida, of course. If you look at the land owned at March 31, we owned about 8,700 lots. A year ago in Florida, we owned 9,800 lots, so we are down more than 1,000 lots. We continue to very closely analyze that. But also, as Bob said, margins on new orders are still in the 20% range. I mean, we continue to look at that every quarter if we need to do anything, and we think we've done everything we need to thus far.

The other thing I'll say, because I think it's important, we've been in Tampa since 1981, we've been in Orlando since 1985, and we've been in Palm Beach County since 1985, and we did ramp up our investment considerably at the beginning of 2000 and 2001. You're correct, Alex, in your assessment. Long-term, we remain very bullish on the strength of the Florida housing market as an area where M/I can introduce over the long haul very strong results.

Right. I mean, I think well about the Florida market in the long haul, too. I guess I was just concerned maybe the prices paid for those lots in the last couple years might have been higher than what those lots would go for today.

And that's a very good question. We continue to look at that very closely. Just because the land was bought in the last year or two -- I mean, it may have been tied up for 6 to 24 months.

Exactly. One of the things -- every build is different, and every piece of ground is different, and even within the same market, obviously, and as a company that historically had developed about 80% of its ground in Florida, that meant from the moment we acquired it, the likelihood was that we had it in contract, in some cases for at least a year, and in other cases, it could have been for two years, so some of the dates on the acquisition relate to a price that was fixed long before the market hit its peak. So at this point, we've impaired that which we believe is impairable.

Now, did you guys mention how many communities you have in each of your three regions?

Yes, we did, and I will give you that information again. Our active communities today are 81 in the Midwest, 46 in Florida and 34 in the Mid-Atlantic, and our current estimate for the end of the year is to have 77 in the Midwest, 50 in Florida and 42 in the Mid-Atlantic.

Got it. Last question. As it pertains to your SG&A, how many people, I guess, have you guys had to lay off since, I guess, peak levels, peak employment levels through today?

Over a third of our workforce.

One-third.

Yes. Today, we have about 900 people, Alex, and we peaked the third or fourth quarter of '05 at about 1,250 or so. And again, we continue to look at those levels.

But then again, we're actually increasing our staffing in the Carolinas this year, so I mean, there's -- that's a net number.

Right, and so I guess I'm just trying to look at your two line items, the one that's corporate and homebuildings. It's kind of how to think about which of those two would be more variable by revenues versus by just headcount.

Yes, that's a pretty tough one. Some of that type of reporting is a little difficult, Alex. Maybe we just need to do a little side call and kind of help you go through that.

Okay, got it. Thanks so much, guys.

Thank you.

[Operator instructions] Our next question is coming from Joel Locker from FBN Securities. Sir, you may go ahead.

Hi, guys.

Hi, Joel.

Hey, Joel.

I just wanted to ask you about just land prices in the last three months or so. I know you gave an update on your last conference call, but I'm just wondering if they've changed much. I imagine they're down year-over-year a little bit, but just if they've fallen in the last three months or so.

I think land prices continue to drop in every market except for Charlotte and Raleigh, at least the markets that we're in. Now, we're not a very aggressive buyer these days, so I'm not sure that our feeder is close to the conditions as they might otherwise be, and it's going to differ for market to market, but it's still very soft, and it's in the same way that the housing operation is in an exceedingly strong buyer's market, so is it so on the land side.

That's what I was going to say. It doesn't seem like many builders at all are buying land. I'm just wondering who are the buyers.

No. I mean, we're working on a number of parcels that we're trying to sell. So are a lot of other builders. There are more sellers than buyers.

Can you identify some of the buyers or anyone that's actually prominent on the buy side for the land?

No. In some cases, it could be for a different or slightly different use. We've had some success selling some parcels to apartment -- parcels that were going to be used perhaps for detached townhomes for sale we've had success selling to apartment developers. But sales have been few and far between, and it would be unfair to try to draw any kind of rule because there haven't been enough. They've just sort of been spot here and there.

Right.

Most of our land reductions have occurred as a result of disposition, working through the backlog, selling and closing houses, and canceling deals under contract.

Right. And on the actual acquisition side, I mean, have you seen some of the small, private distress builders? Have they really deteriorated in the last three months, or is that so far off?

I think this is an area where, again, the conditions are going to differ from market to market. To the extent that builders that are for sale -- and there are a lot of them that probably are -- are going to want to at least have their debt covered and probably their equity covered. My guess is that is a bad deal, because the assets are probably overstated. We know the liabilities aren't overstated, and if they want their equity covered on top of it, it's just a question of how much you're overpaying, and I think to the extent that the sellers are still in denial about what they're really worth, it's not a -- the real opportunity to buy isn't there.

So you haven't seen much for selling by a bank that steps in and just says, "Well, we're going to have to liquidate you if you don't liquidate yourself"?

I don't think we've really seen that with any small builders yet.

Right. Phil, can you just repeat, I guess, the first quarter advantage of the previous impairments that passed through?

Okay. As far as the gross margins, for the first quarter, the '07 gross margin was negatively impacted by 50 bps due to the first quarter impairment charges, but they were benefited by 2.4 million, or 100 bps, from the impairments recorded in '06. So overall, the margins were improved by 50 bps.

Right. And what does that trend? I mean, you can't tell the impairments, but the actual passing through of the impairments, the 2.4 million you gained this quarter. I mean, what does that look like for the second, third and fourth quarters of '07?

The way I would kind of guess at it, Joel, is that when you look at our estimated closings, the 3,000, it breaks down [inaudible] 700 the first quarter. We're estimating about 700 for the second, 750 the third and 850 the fourth. So I would guess, in general, it would be about the same.

Right, about the same.

[Inaudible] because the biggest part of the impairments came from the D.C. marketplace, so you have a mix a little bit, but I would say it probably wouldn't vary a whole lot.

So at that run rate, I mean, that might take you seven years to have all of the impairments from the fourth quarter pass through. Is that a way to look at it, or it might accelerate, say, in '08, like if you're doing $10 million a year and you incurred $70 million in land?

No, I don't think that's --

No, I wouldn't look at it that way.

So the D.C. will pick up later, maybe?

Yes.

The 2.5 million a quarter --

I would think it would all get through the system in three to four years, half the time you're saying.

In three to four years. All right, thanks a lot.

Okay.

Our next question is a follow-up from Dennis McGill.

Hey, guys. I was just trying to put it in perspective. You said that you had cut your workforce by a third. Is that right?

From the peak, right.

From the peak, but we're still seeing the fixed SG&A fairly flat, so what are the offsets there?

Well, keep in mind, though, Dennis, we are reporting severance charges. Severance is still coming through. You don't get the impact of those cuts for a couple of quarters down the road. And then we headed into the first quarter of this year about $1.3 million, pre-tax, of severance charges, so, again, it takes a while to get those benefits from that. And also keep in mind the deposits and the pre-acquisition costs, those types of things, go through the SG&A line. They go through there also.

Yes, we would be pulling that out, but would you say, from a dollar perspective, that first quarter total SG&A would be at peak?

Would it be at peak?

From dollar terms, yes.

I'm not sure I would say that, because a lot of our compensation is incentive. I mean, if we were to have a lot better results -- I wouldn't say it's the peak. I wouldn't say it would go up a whole lot.

I'm just referring to over the next couple of quarters.

I'm not sure I would say it's at peak, Dennis, because as we do more volume the third and fourth quarter, that drives some of those costs up, so I would not say it was the peak.

All right. That's all I had. Thanks again.

Our next question is a follow-up from Bob Whittenhall.

Hey, just a quick question. I know that Meritage recently issued senior sub debt to term out its maturities and pay down its bank credit facility, and I know you guys, selling $100 million of preferred shared, accomplished a similar thing, but through the issuance of equity, and I was wondering if you had an intention, given the fact that you will anticipate paying down your bank credit line, of approaching the rating agencies and possibly looking to get an upgrade at some point this year.

I can't really comment on what competitors do. I mean, we thought the preferred stock transaction was a very good transaction for us. With the impairments in the fourth quarter of last year, we wrote off $45 million of our net worth. We thought bringing $100 million more of equity into the company would just improve our financial condition a whole lot. We're obviously always focused on our leverage, our interest coverage and our credit rating. As far as what we'll do in the future, it's determined a whole lot by how we perform, what happens to the markets, et cetera. But again, we thought the preferred stock transaction made a lot of sense for us, and we think we're in pretty good shape today.

I was saying it in the sense that that's a more conservative move than issuing senior sub notes, and on the basis of that and your expectation to repay bank debt, would you want to go in for an upgrade?

We're always looking for an upgrade. We didn't ask for the Moody's downgrade. [Inaudible] it was warranted, although we have a lot of respect for Moody's, obviously. But those upgrades will come in time as the housing cycle begins to turn and performance metrics warrant it.

I mean, we'll take all the upgrades we can get, but it's pretty hard to get an upgrade when you have a loss in the fourth quarter and make $2 million in the first quarter. But obviously, it's something that we're always focused on.

Yes. On the same token, the 30 to 35% net debt to capital is squarely in line with an investment-grade profile.

But there are other parts to that other than leverage. There's your interest coverage, your inventory terms -- there are a lot more factors than that. But obviously, we do stay focused on that, and we'll do whatever we can.

Okay. Thanks very much.

Uh-huh.

There appear to be no further questions at this time. I would like to turn the floor back over to Mr. Creek for any further remarks.

Thank you very much for joining us. We look forward to talking to you again after the second quarter.

This concludes today's M/I Homes conference call. You may now disconnect, and have a wonderful day.