M/I Homes Inc (MHO) 2007 Q2 法說會逐字稿

Good afternoon, ladies and gentleman. My name is Pam, and I will be your conference operator today. At this time, I would like to welcome everyone to the M/I Homes second quarter 2007 conference call. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Phil Creek. Sir, you may begin your conference.

Thank you very much for joining us today. Joining me on our call from Columbus, Ohio, is Bob Shottenstein, our CEO and President; Paul Rosen, the President of our mortgage company; and Ann Marie Hunker, our Corporate Controller.

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 nonpublic items with you directly. 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 July 2008.

Now, turning the call over to Bob Shottenstein.

Thank you, Phil, and thank you for joining us today. Today's release is further evidence of the challenging and uncertain conditions plaguing the homebuilding industry and the nation's homebuilders. Though we were slightly encouraged by our first quarter results, in particular our new contracts and a reduced cancellation rate, macro conditions in the second quarter deteriorated as a result of a number of factors, including the widely reported and well-documented concerns over credit tightening and difficulties in the sub-prime market, excess inventory of both new homes and used homes, and weakening demand. All of these factors have led to further price competition and margin erosion in most of our markets.

We continue to estimate that we will deliver approximately 3,000 homes this year. However, as stated in our July 12 units release, current market conditions make it difficult for us to reasonably or fairly predict either new contracts or margins on future deliveries. Accordingly, we have withdrawn our earnings guidance for 2007.

Notwithstanding these difficult times, we were pleased that, excluding impairments and other write-offs, our business produced 22% gross margins and profits for the second consecutive quarter. In addition, we continue to strengthen our balance sheet, with our owned lots reducing 9% from the end of last year and bank borrowings falling from $410 million at the end of last year to $265 million at the end of the second quarter.

While we continue to employ a predominately defensive operating strategy, we are also focused on a number of initiatives aimed at improving and refining our core homebuilding operations. These initiatives include enhancing the customer experience, better utilization of the Internet as a sales and marketing tool, greater emphasis on sales and production training, and delivery of new products. We are also quite excited about our recent decision to enter the Chicago market.

Though no one can predict with any degree of certainty when or how current market conditions will begin to improve, one thing is clear, and that is that homebuilding is a cyclical business. We strongly believe that M/I is well positioned for what will be an eventual improvement in our industry.

Now before I turn things back over to Phil, who will review in detail our financial results, let me briefly review the performance of our three regions. First, the Midwest region. The Midwest continues to be challenging due largely to lackluster employment growth. All three of our current Midwest markets -- Columbus, Indianapolis, and Cincinnati -- continue to see a decline in single-family permits. Our June 30 backlog in the Midwest carried an average selling price of $260,000 versus $280,000 a year ago, due primarily to margin compression but also in some part due to product mix. At the present time, our gross margins on sales in the Midwest average about 15% and we expect to deliver approximately 1,400 homes in Columbus, Indianapolis, and Cincinnati this year.

Next, I'll discuss Florida. Our Florida region experienced declines in new contracts in the second quarter. There are, to be sure, significant pricing pressures in Florida, and our cancellation rates increased from about 25% last year at this time to nearly 40% presently. Our Tampa operation is having a pretty good year, given market conditions, while Orlando and Palm Beach County continue to be very soft. We expect to deliver approximately 900 homes in Florida this year, which will be about half of last year's performance. At the present time, our gross margins on new orders in Florida have weakened considerably from where there were a year ago, ranging in the 15 to 19% range.

Finally, the mid-Atlantic region, which for us is Charlotte, Raleigh, and D.C. New contracts and homes delivered for this region increased 45% year to date when compared to the same period in '06. Housing fundamentals in our Charlotte market are currently solid but have clearly slowed slightly. In the second quarter of '07, homes delivered increased 55% compared to the same period in '06, and in Charlotte we expect to open a couple of additional communities later this year. The market is good but it is clearly slowing.

Our Raleigh operation is growing. Raleigh may, today, be the perhaps strongest market we're operating in. We are currently open in eight communities and expect to be open in a couple more by the end of '07. Our sales in Raleigh have nearly doubled in the first half of '07 when compared to the same period of a year ago and our units and backlog in Raleigh are up 75% year over year.

In D.C., we have seen slight improvement this year as new contracts and homes delivered have increased for the quarter and year to date approximately 25% and 45%, respectively. To be sure, however, our recent reductions in sale price and incentives have stimulated our selling results in greater D.C.

Our margins -- gross margins -- on new orders in Charlotte and Raleigh today hover around 20% and our gross margins in the D.C. market range around 15%.

And with that, Phil will now discuss in more detail our financial results.

Thanks, Bob. New contracts of 688 for '07 second quarter were 10% below last year's 764. And this compares to a 17% decline in the first quarter of '07. For the quarter, traffic increased 12% and the cancellation rate was 29%. As for the monthly details, our sales were down 7% in April while traffic was up 22%; sales were down 8% in May while traffic was up 3%; and our sales were down 15% in June and traffic was up 12%.

Gross new contracts were down 11% for the quarter.

Our active communities decreased from 165 a year ago to 161 today. We peaked in 2006 at 930 with 170 communities. The breakdown by region today is 80 in the Midwest, 47 in Florida, and 34 in the mid-Atlantic. Our current estimate for year-end '07 is to have approximately 156 communities open -- by region, 73 in the Midwest, 45 in Florida, and 38 in the mid-Atlantic.

Homes delivered in '07 second quarter were 755, declining 24% when compared to '06's 987, and we delivered 43% of our backlog this quarter compared to 32% in '06.

Revenue in the second quarter declined 24% when compared to '06, primarily due to the 24% decline in homes delivered and an average sales price decrease of 2% to $301,000. Revenue for the first six months of '07 declined 19% when compared to last year due to the 20% decline in homes delivered.

In the second quarter, we recognized a pretax impairment of land and work-in-process inventory of $62.1 million and $4.0 million, respectively. The majority of the impairments occurred in Florida in the second quarter. In total, nearly 4,000 lots in 31 communities were impaired in the second quarter of '07. And over the last nine months, we have impaired approximately 33% of the lots that we control. Over all, in the past nine months, we have incurred pretax land and investment-related impairment charges of $139 million, impacting approximately 64 communities, or about 40% of our active communities to date. We continue to analyze our housing inventory and investments each quarter, and it is possible that the company will incur additional impairment charges.

In addition to our second quarter pretax land-rated impairment charges of $56.1 million, we wrote off another $850,000 of deposits and pre-acquisition costs for land and lot deals we no longer intend to pursue, and we incurred $5.2 million in charges in the second quarter for the write-off of intangible assets related to the '05 acquisition of a Florida builder.

For the six months ending June 30 '07, total charges were $74.3 million, broken down as follows -- $57.2 million for impairments, $1.9 million for land and lot deals, and $5.2 million for intangible assets.

Our gross margins, exclusive of the impact of the '07 impairment charges, were 21.5% for the quarter and 21.6% for the six months ended June 30. This compares to 27.6 and 27.4 for the quarter and year to date in '06. Our estimated gross margins in backlog today are approximately 19% and we continue to see margin pressures.

During the quarter and year to date, we incurred losses on land sales of $2.1 million and $1.1 million, respectively. This compares to profit in '06 periods of $980,000 and $1.1 million. The loss for the quarter and year to date includes a $2.4 million impairment related to land in Florida. We currently have $55 million of land held for sale on our balance sheet, of which about $42 million is currently under contract.

G&A cost in '07's second quarter decreased $2.3 million and, as a percent of revenue, increased to 11.5% from 9.4 in the prior year quarter. Year to date, G&A cost decreased $719,000 and, as a percent of revenue, increased to 10.6 versus 8.7 for the same period last year.

The dollar decrease in the second quarter is primarily attributable to $2 million decrease related to reduction in payroll and incentive items, $600,000 decrease in write-offs of abandoned land transactions, $5.9 million decrease related to charges taken in last year's second quarter -- offset in part by the $5.2 million charge for the write-off of acquisition intangibles I mentioned -- and $1 million of higher costs related to our investment in land such as real estate taxes, site maintenance, and homeowners' association dues.

G&A cost as a percent of revenue prior to severance costs, abandonments, and write-offs, was 8.8 for the quarter and 8.7 year to date. Selling expenses for the quarter and six months ended June 30 increased 150 basis points to 8.3 and 8.2%. And, from a dollar perspective, selling expenses for the six months decreased $6.3 million, primarily as a result of volume decreases, reduction in advertising and media costs, and payroll-related decreases related to market conditions.

Over all, our second quarter SG&A expenses decreased $5.6 million as a percent of revenue with 19.8 in the second quarter of '07 compared to 18.8 year to date. Excluding abandonments, severance, and write-offs, SG&A as a percent of revenue for the six months ended June 30 was 16.9. We are constantly monitoring and working on controlling and reducing our expense levels.

Our operating loss in the second quarter of '07 was 26.4 of revenue and for the six months ended June 30 was 11.8 of revenue compared to income of 10.8 for the second quarter of '06 and 11.1 for the six months of '06. Exclusive of the charges I've discussed, operating margins were 4.3 and 4.7, respectively.

Interest expense decreased $1.2 million for the second quarter and $86,000 for the first half of '07 as compared to last year. The decrease in the second quarter was primarily due to a decrease in the weighted average borrowings from $623 million in '06 to $483 million this year. And the decrease was partially offset by a $1.1 million decrease in capitalized interest as we have had less land under development when compared to last year.

Our quarterly weighted average borrowing rate increased to 7.5% from 7.2% a year ago. We have $39.9 million in capitalized interest on our balance sheet at June 30 compared to $30.3 million a year ago, 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 under development and when houses are being built.

And our effective income tax rate, both for the second quarter and for the six months, is 38.4% compared to 38% last year.

For the second quarter, we incurred a net loss of $40.2 million compared to last year's second quarter net income of $18.3, and year to date we incurred a $40.4 million net loss compared to last year's year-to-date net income of $34.7 million.

For the second quarter, we had a loss per common share of $3.05 and for the first six months, we had a loss per common share of $2.89. These per-share common results include 321 and 337 per common share for the previously mentioned charges, including severance incurred during the quarter and for the first six months. And during the quarter, we paid $2.4 million in preferred stock dividends. This compares to last year's earnings per diluted share of $1.29 in the second quarter and $2.43 in the first six months of last year, which included $0.34 per diluted share impact for surcharges incurred in the '06 period.

With that, I will now turn it over to Paul Rosen to address our mortgage and title operation results.

Thank you, Phil. Mortgage and title operations pretax income decreased from $4.3 million in 2006's second quarter to $2.2 million in the same period of 2007. The change was partially the result of the 24% decrease in loans originated from 675 in 2006 to 515 in 2007. Additionally, increased competition in financing initiatives caused the erosion of margins.

Loan to value on our first mortgages for the second quarter was 84% in 2007 compared to 81% in 2006's second quarter. For the quarter, 89% of our loans were conventional, with 11% being FHA/VA. This compares to 87% and 13%, respectively, for 2006. The FHA maximum mortgage limits in the markets that we operate in range from $200,000 in Indiana and North Carolina to $363,000 in Virginia and Maryland.

Approximately 12% of our second quarter closings were adjustable rate mortgages. This compares to 38% in the second quarter of 2006. 19% of our first, and 12% of our second quarter 2007 applications were adjustable rate mortgages. Of mortgages closed by M/I Financial during the second quarter, 17% were interest-only loans. This compares to 22% in 2007's first quarter.

Over all, our average total mortgage amount was $250,000 in 2007's second quarter.

The average borrower credit score on mortgages originated by M/I Financial was 714 in the second quarter of 2007 compared to 716 in the first quarter. These scores compare to 719 in 2006 second quarter and 717 in 2006 first quarter.

The percentage of customers that received down payment assistance in the second quarter increased to 7% versus 4% for the same period of 2006. In the second quarter, the average mortgage balance on these down payment assisted originations was $173,000, compared to $179,000 in 2006. The majority of these customers are in our Indianapolis and Columbus markets and buy our entry-level product. We sell our mortgages, along with their servicing rights.

Our contingent repurchase obligation due to loan delinquency is primarily limited to the first couple of payments being made timely. In the last couple of years, we have not repurchased any loans but have provided indemnification on certain loans. The total of the indemnified loans is approximately $2.4 million as of June 30, 2007. The company has accrued for the estimated costs which could be impaired.

With the mortgage operation capturing about 74% of our business in the second quarter compared to 2006's 83%, we believe there will be continued pressure on our capture rate due to increased competition if the mortgage business remains slow. We continue to put programs in place that we believe will help with our capture rate.

Recently, the topic of sub-prime and alternative mortgages has received a lot of attention. As mentioned in the prior conference call, 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 in the performing category due to a variety of reasons such as documentation, residency, or occupancy.

In the second quarter of 2007, 6% of our closings fell into the sub-prime category. Of these loans, 35% were brokered to third party mortgage companies. Approximately 16% of our second quarter closings were in the alternative category, with the majority of these brokered. We do not have statistics on the percentage of sub-prime and alternative loans in the 26% that we do not capture in our mortgage operation.

In light of the changes in the sub-prime market and alternative 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 also feel that new home sales will not be significantly impacted.

Exclusive of the impairment, abandonment, and severance charges for the quarter and year, our mortgage and title business produced 23% of total operating income during the second quarter and 24% year to date. This compares to 13% and 14%, respectively, for 2006's same period.

Now I'll turn the call back over to Phil.

Thanks, Paul. As far as the balance sheet, all amounts and percentages discussed will include the impact of the impairment charges.

Total homebuilding inventories at June 30 decreased $172 million, or 13% below last year. Our total unsold land investment at 6/30/07 is $663 million, compared to $828 million at June 30 of '06. Raw land and land under development values decreased 33% and 60% from a year ago, and finished unsold lots increased 72%. At June 30 '07, we had $185 million of raw land, $141 million of land under development, and $337 million of finished unsold lots.

The market breakdown of our $663 million of unsold land is $216 million in the Midwest, $272 million in Florida, and $175 million in the mid-Atlantic region.

In the second quarter, we purchased $5 million of land. Our current estimate for '07 land acquisition is about $28 million, compared to $164 million last year. And the majority of the expected '07 land purchases are in our Carolina markets.

At June 30, '07, we controlled 19,641 lots. We owned 17,623 and controlled an additional 2,018. This compares to a prior-year total control of 26,957 where we owned 20,347 and controlled an additional 6,610. Our peak owned lots was 21,318 at March 31, '06. Our current level of 17,623 represents a 17% decrease. The June 30 '07 mix of lots owned are 39% Midwest, 47% Florida, and 14% mid-Atlantic. And all numbers include our prorated share of joint ventures and the executed lots under contract to sell to third parties.

We have approximately $9 million at risk in deposits, letters of credit, and pre-acquisition costs at June 30 of '07, which covers our lots under control. We continue to reduce our land position.

At June 30, '07, we had $50 million invested in joint ventures, with approximately $32 million of this being in Florida. These savings are for land acquisition and development purposes and are with homebuilding partners. Three of these ventures have third party financing and are conservatively leveraged, with approximately 55% debt and 45% partners' equity. During the quarter, we wrote off $3.5 million in charges related to our joint ventures.

At the end of the quarter, we had $99 million invested in specs; 222 specs were completed and 387 were in various stages of construction, for a total of 609 specs. This translates into about four specs per community. And of the 609 specs, 280 are in the Midwest, 210 are in Florida, and 119 are in the mid-Atlantic. And at the end of the first quarter, we had 636 specs, with $100 million of investment.

At June 30 '07, there was $265 million outstanding under our revolving credit facility which matures in October 2010. This compares to $447 million at June 30 '06 and $410 million at December 31 '06. We expect this balance to decline throughout 2007 and currently estimate borrowing about $160 million at the end of this year. This estimate translates to a total reduction in our borrowings for the year of approximately $250 million, of which approximately $154 million would come from operating cash flows and $96 million as a result of our first quarter preferred stock offering.

Year to date, we generated cash flow from operations of approximately $60 million.

Long-term debt at June 30 '07 totaled $487 million, compared to $656 million at June 30 '06. This includes $200 million of public senior notes that mature in 2012.

Homebuilding net debt to equity was 67% at 6/30/07 versus 104% a year ago, and homebuilding net debt to cap improved to 40% versus 50% a year ago and 44% in 2006's year end. Our targeted net debt to cap ratio is 50% or lower, and during these challenging times were are focused on having a less leveraged balance sheet.

Our interest balance for the quarter was 3.2 times EBITDA. EBITDA for the quarter was $16.9 million. Interest incurred for the quarter was $8.5 million compared to $11.1 million in '06's second quarter.

We currently estimate that we will be in compliance with all debt covenants, at least through the end of this year. We are meeting with our banks in August for our semi-annual bank meeting. We did not repurchase any Treasury shares during the second quarter. At quarter end, we had 3.6 million share 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 is approximately 60% of our current book value, we will continue to be thoughtful about 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.

Total shareholder equity at June 30 '07 is $676 million, with a book value per common share of $41.

In summary, we continue to see challenging market conditions and anticipate this environment continuing. As Bob mentioned, while we continue to estimate that we deliver approximately 3,000 homes this year, current market conditions make it difficult for us to predict either our new contracts or margins. Accordingly, as we noted in our release earlier this months, we are no longer providing earnings estimates.

This completes our formal presentation. We'll now open the call for any questions or comments. Pam?

(Operator Instructions) Thank you. Your first question is coming from Nitin Dahiya with Lehman Brothers.

Good afternoon.

Hello.

The $71 million in charges -- all of those are on the gross profit line, or are some-- the $5.2 million is in the G&A? I'm sorry; I missed that.

$5.2 million's in G&A.

Okay; and the rest is in the gross profit line?

$800,000 deposit abandonment is in G&A as well. 60.1 in the quarter-- 66.1 in the quarter in cost of sales.

Great. And what was the availability on the credit facility as of the end of the second quarter?

Phil, you've got that.

At the end of the second quarter, we were borrowing $265 and the line is $650.

So all of the rest is available? Some LCs, I suppose; right?

Excuse me?

There would be some letters of credit also -- about, what, $300 million available?

I don't know the number (inaudible).

You mean, as far as what's available under the borrowing base and that type thing?

That's right.

There's plenty of room in the borrowing base; it's in the $150 to $200 million range of excess in the borrowing base; that's not an issue.

Okay, great. In terms of the use of free cash flow, is it primarily for debt reduction you mentioned that you expect to be at $160 million at the end of the fourth quarter? Or if there was some, if you like, strategic growth opportunities or small acquisitions, would you be looking at those as well?

Primarily for debt reduction at this point.

Great. And lastly, on lot counts -- are they where you want them to be or-- I mean, in this environment do you see that you will reduce them further, looking ahead?

They need to be further reduced. Based on this environment, they're not where we'd like them to be.

Okay. And any order of magnitude that you could share?

Our goal has historically been to control-- to own a two- to three-year supply of land. And we're-- based upon the declining market conditions, that's not where we are. We appreciate the call.

Thank you.

Any other questions?

Thank you. Your next question is coming from Alex Barron with Agency Trading Group.

Hi; good afternoon, guys.

Hey, Alex.

I wanted to ask you -- hoping you can help me reconcile a couple of things. So last quarter you guys gave the gross margin and your backlog for each region similar to this time. So I'm trying to understand how the gross margins, I guess, ended up being a little higher this quarter than what you guys had, I guess, in backlog last quarter.

Well, a couple of things, Alex. When Bob gives gross margins, he's giving what we're selling at today.

Those are gross margins by region on new orders.

And it may take those three to 12 months to flow through. We always try to be a little bit conservative in what we give you -- and we have been a little bit pleasantly surprised in that margins have been a little better than we thought. We've worked very hard at cost reductions. We've also worked very hard at keeping our backlog intact because some of the orders from the last few quarters have been at higher margins. So we have been a little pleased that they have been a little higher than what we expected.

Got it. I guess I was just also wondering whether maybe some of the incentives you guys have been giving have flown more through the SG&A line as opposed to the total cost of control line.

No.

No, most of our incentives actually go through revenue; go through the margin line. It's another issue if we're going more advertising; that would go through the SG&A line. But as far as incentives we're giving, no, they pretty much all fly through the gross profit line, Alex.

Okay, got it. And then, my second question -- going over impairments, you guys gave a pretty good summary there but I was trying to line up the number of communities you said this quarter versus last couple of quarters. So I guess there's a few communities that got re-impaired this quarter? And are they mostly in D.C.? Is that what's going on?

There were about 15 communities that we adjusted the impairment, Alex. And as you know, you make certain assumptions every quarter and then you re-check those assumptions down the road. And the end of last year, when we did approximately $70 million of impairments, $40 was in the mid-Atlantic, $20 was in the Midwest, $10 million was in Florida. So to answer your question, most of the re-impairments were in the mid-Atlantic.

That's right.

Okay. I mean, do you have a total breakout by region of what the total number of impaired communities are to date?

Well, what we supplied in the press release was we gave the impairments by region for this year and--

Right; you gave it in dollars. I was just wondering if you had it in number of communities as well.

We gave it to you as best, kind of, we're going to, really, not getting into more detail than that. What we talked about is this year in the second quarter, we impaired about 31 communities and when you look at in the last nine months, we've impaired about 65 communities. So that's kind of the information we're going to give, Alex.

Okay, and just one quick last one, Phil. In terms of the assumptions you guys build in when you do the impairment analysis, I know most builders typically say that they're building in current market conditions. Does that mean you assume the current sales pace forever, or you assume that, like, a year out the sales pace goes back up to, like, one sale per community per week or something like that?

Alex, that's a very good question, and we're in the subdivision business and subdivisions are looked at individually. We have sold more houses the first six months in the impaired communities than we've been modeling. So we think we're using fairly conservative absorption levels.

You have to also get into assumptions such as do you think your costs are going to go down, go up? Do you think your sales prices are going to go down or go up? We have some communities where we have modeled no price increase, some communities we have modeled some price increase.

So again, every community you have to look at, and we re-look at them ever quarter. We think, over all, we've done a very thorough job and we think, over all, we're kind of middle of the road as far as assumptions. But again, we re-look at that every quarter as well as looking at what the market conditions are.

Okay. Thanks a lot; I appreciate it.

Thanks, Alex.

Thanks, Alex.

Thank you. Your next question is coming from Bob Whittenhall with Royal Bank of Canada.

Hi; good afternoon.

Hi, Bob.

Hi, Bob.

Two questions, and I guess this is kind of on the tail end of Alex's. Forgetting about ASP and looking more towards unit volumes, do you expect the first half of '08 to be flat with 1H '07?

That's a great question, and it's one that we're not going to answer. We're don't feel that we can-- for the same reason we're pulling our earnings guidance, it'd be very, very difficult and probably imprudent for us to make any assessment as to our level of sales or closing activity in '08.

I will say that for quite some time, really since the beginning of '06, it was our view -- for what it's worth, anyway -- that market conditions would be tough in '06, throughout all of '07, and that they would begin to improve in the first half of '08. And earlier this year, we retreated from that position and now believe, at least from a planning standpoint-- no one knows when things are going to get better, but you have to make certain assumptions and plan accordingly. We think that things are not likely to get better for our industry. And I know every market is different, but to paint with a broad brush, we would say that things are not likely to begin to get better until the early part of '09.

That's actually a really helpful answer. You guys went through really fast on your cash from operations -- I think you threw out a 160 number?

Yes.

Could you just back me in? You guys were moving real fast with that.

Well, if you look at our cash flow this year, the two big things are that we did $100 million of preferred stock the first quarter, which we netted about $95. And the other thing is, to look at it simplistically, is delivering about 3,000 houses this year with our average lot cost about $65,000. And assuming we only buy about $25 million in land, but we also sell about $25 million of land, then cast reduction is those 3,000 lots at about $65,000. So that generates about another $190 million for the year. So that's kind of an easy way to look at it as far as the year as far as the cash available from operations.

Got it. I was also curious -- you mentioned expansion into the Chicago market.

Yes.

Do you just like it because of the stability, or what's the appeal of doing that, given the fact that there's still a grim outlook nationwide for homebuilding?

Well, it's really a number of factors. For one thing, for years and years and years, Chicago's been one of the strongest housing markets in the country. It's one that we have believed, for some time, that we could compete in. It's one that we've had our eye on for some time. But it's one that we were not about to go into at this point through acquiring another builder -- or, stated another way, overpaying for someone else's land.

We knew we were going to do a startup and one of the biggest issues with determining when we would do a startup is when we could find the right person to help us start that operation. And maybe a little earlier than we anticipated, but nonetheless, we're very excited. We have an excellent operator to lead our Chicago business. It's our hope to be open in several communities early next year. Chicago will not contribute meaningfully to profits or lack of profits next year but over time, as the markets begin to turn -- and they will turn -- we expect the Chicago operation to be an important part of M/I Home's future success.

Great. And one final question. The basket you have now that's authorized by the Board for share repurchase, $6 million--

It's about $7 million.

$7 million. But essentially, the focus is specifically on balance sheet management as opposed to repurchasing equity at this stage. And I assume there are no plans to increase the basket for the rest of the year?

Well, first of all, to answer the first part of your question, the answer is a big yes. The focus is on balance sheet and debt reduction rather than share repurchases, notwithstanding the current price.

It's not our plan, presently, to ask the Board to authorize additional share repurchases. There's no point in speaking for the Board, but I suspect if the conditions warranted taking a different approach, it wouldn't be terribly difficult to get that authorization.

Got it. And you're not anticipating a violation of your minimum interest coverage ratio on the interest-- EBITDA to interest? Could you just remind me -- that's 2 times, right?

The covenant is 2 times, and our comments were we expect to be in compliance with all of our covenants through the end of the year. We get our banks together twice and spend time with them, sharing with them our revised budgets, our outlook internally for the next couple of years. And we're having that meeting in August. We have had discussions with our banks about, confidentially, how the next couple of years look. And, again, we'll continue those discussions in August when we're together with them.

Got it. Thanks very much, guys.

Thank you, Bob. Any more questions?

Thank you. You do have a question coming from Jennifer Machan with Aviva Capital Management.

Hi; [Jennifer Mahan] with Aviva. I just have a question and I apologize if I missed this in your commentary. What was your total can rate for the quarter?

Good question. I don't think we shared it.

Yes, I think the cancellation rate was 29% for the quarter.

29%.

Okay. And one other question. Have you guys commented at all on what traffic for the month of July has looked like in any of your markets?

No, we don't have all that information yet and we'll talk about that when we release third quarter information.

Okay, great. Thanks.

Thank you. (Operator Instructions) Your next question is coming from Joel Locker with FBN Securities.

Hi, guys.

Hey, Joel.

Hi, Joel.

Just wanted to see, on your impairment reversals in the second quarter, how much did that benefit-- or, how much-- what was the dollar amount of that?

Joel, that was approximately $4 million pretax. But also, you have to look at-- we have been selling at a faster pace than we had estimated in our impaired communities. In certain communities, we've actually been able to increase prices here and there. But the $4 million is just the amount of the impairment reversal.

Right. And then, with the larger impairments this quarter, would you expect that to spike up in future quarters just because the magnitude is, I guess, about $130 million or so now?

That's hard to estimate, Joel, towards when that's going to come off. But--

It just depends on absorption rtes.

Exactly.

And just on your land spend for land under development, what do you estimate that to be in 2007? Just developmental costs on--?

We don't give those types of estimates. The estimates we give, Joel, are what we expect to spend on land. And, again, that's a little less than $30 million. We're obviously reducing our raw land; we're reducing our land under development; our finished lots have gone up. But we continue to be very mindful of active communities; our new communities continue to come down in this environment. So again, we're focused very much on where we're spending dollars and so forth. But we don't give the breakdown by development dollars and so forth.

Right. And just on the impairments in general, do you look at-- do you do an impairment test on communities that have yet to be started or may be just in the initial phases or planned for years out or is it just the more recent communities?

We look at everything, all categories -- raw land, land under development, finished lots. You look at everything, Joel.

And I think from the last call I remember looked around for a gross margin around 10%; is that kind of in line with what you look at before you start testing?

Yes, in general. Again, it depends on the community and everything, but in general, if you're selling at a 10% gross margin, you need to look very closely at it from an impairment situation.

Right. And just maybe if you could speak briefly on just land prices in your different regions and what they look like versus a year ago and even maybe three months ago?

Well, they haven't gone up -- I mean, at the risk of saying something silly. But they really haven't come down like you might expect them to. I mean, first of all, it depends who's the seller. Of the seller is a homebuilder, like M/I or some of our competitors who are trying to unload some ground, you might see a greater willingness to negotiate the price down to get the ground off your books. Maybe we're more realistic sellers.

But other sellers, the more traditional land seller-- have not really seen-- And it could differ dramatically from market to market, but really haven't seen the reduction. I mean, when you talk about land purchases for M/I, and Phil mentioned that this year, we'll purchase somewhere around $25 to $28 million worth of ground as opposed to $160 million last year.

Unlike last year, virtually everything we're buying now is finished lots and largely in our Carolina markets. And maybe there's been a little renegotiation of some of those take-down agreements, but the Charlotte and Raleigh markets, for us, anyway, have held up very well, comparatively.

Would you say land prices in Charlotte or Raleigh are just kind of flattish year over year, whereas maybe in Florida it might--?

Quite honestly, flat or perhaps slightly up in Charlotte and Raleigh. Particularly earlier this year, the Charlotte market was doing even better than it is now. Florida -- I mean, if someone needs to sell, prices are coming down. If someone does not believe they need to sell, they're not.

Because I remember you guys-- I think you guys walked away from a piece in Palm Beach that was maybe a $35 million purchase maybe 18 months ago.

You've got a great memory.

And I just was wondering -- what would that go for nowadays, do you think? Maybe $15 or would you--?

Realistically, or--?

If they had an auction or-- a real market price, not an offer price?

You're probably closer than we were 18 months ago.

Right. Well, that's a good thing. [Laughs] All right. Well, that's about it. Thanks a lot, guys.

Thank you.

Thanks, Joel.

Thank you. Your next question is coming from Alex Barron with Agency Trading Group.

Thanks, guys, for the follow-up. Just wanted to ask if you can talk about market conditions throughout the various Florida markets you're in? And also in D.C., what you're seeing there?

Well, we tried to do that a little earlier on the call. To be sure, things have slowed considerably in our three Florida markets. For us, anyway, we're probably having a little bit more of a difficult time in Orlando and in West Palm Beach than we are in Tampa. In terms of financial results, our Tampa operation's actually going to have a pretty good year, but they have some good back wind, or tailwind, from a pretty good backlog.

Our sales in the D.C. market have been better this year that they were last year at this time, but I think that's more a result of-- well, I don't think; I'm fairly certain that it's more the result of much more aggressive pricing from us. And we did-- we smartly impaired some pieces there.

There is some evidence, particularly with respect to the number of existing homes on the market based on the reports that come out of the MLS data, that the amount of homes on the market is leveling off or even slightly declining over the last four or five months in greater D.C. I don't know that it's materially declined-- Well, it hasn't materially declined, I should say. But at least it's declining, and that appears to be a step in the right direction.

And the prospects for job growth in D.C. remain very strong over the next two to three years. So you would think that, as we begin to burn through the excess inventory, that market would begin to come back, perhaps a little sooner than Florida.

And in terms of talking about inventory, I think you probably gave it but I must have missed it. What was the total number of homes under construction and what percent, or what number, was spec?

(Inaudible)

We have a little over 600 specs and about $100 million of investment, and that's a couple less units but about the same amount of dollars as it was in the first quarter. So our spec level has stayed about the same, Alex. And we kind of think it's going to be in that four-per-community-type range.

Okay. And what was the total count under construction?

We don't really give that. What we told you was that the market breakdown of our $663 million of unsold land was $216 million in the Midwest, $272 million in Florida, and $175 in the mid-Atlantic. That's the breakout we give.

Okay; thanks, Phil. Thanks, Bob.

Thanks, Alex.

Thanks. Are there any other questions?

Thank you. There appear to be no other questions, sir. I'd like to turn the floor back over to you, Mr. Creek, for closing comments.

Thank you very much for joining us. We look forward to talking to you again at the end of the third quarter. Thank you.

Thank you. And this concludes today's M/I Homes second quarter 2007 conference call. You may disconnect your lines, and have a pleasant afternoon.