M/I Homes Inc (MHO) 2007 Q3 法說會逐字稿

Good afternoon. My name is Melissa, and I will be your conference operator today. At this time I would like to welcome everyone to the M/I homes third quarter earnings conference call. All lines have been placed on mute to prevent background noise. After the speaker's remarks there will be a question and answer period. If you would like to pose a question during this time, please press star and then number 1 on your telephone key pad. If you would like to restore the question, press the pound key. Thank you. It is now my pleasure to turn over to your host, Phil Creek. Sir, you may begin your conference.

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

First to address regulation fair 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. And as to forward-looking statements this presentation includes forward-looking statements as characterized by the Private Security Litigation Reform Act of 1995. Any statements that are not historical in nature are forward-looking statements that involve risk and uncertainties that could cause actual results to differ materially from those in the forward-looking statements.

Please refer to our most recent 10-K 10-Q and earnings press releases for other factors that could cause results to differ. Be advised that the company undertakes no obligation to update forward-looking statements made during this call. The audio of which will available on the web site through October 2008. I will now turn the call over to Bob .

Thank you Phil, good afternoon. We continue to face challenging conditions in most of our markets due to a number of factors including weak demand, higher levels of both used and new home inventory, lack of consumer confidence, negative press, a more difficult mortgage market caused by a tightening of lender --lending standards and a proliferation of promotions and discounting by home builders. For the quarter, we reported a $1.73 per share loss. This loss included $1.49 per share of charges primarily related to inventory write downs which Phil will detail later in the call.

Also included in the quarterly loss preferred share dividends equal the $.17 per share and a loss from operations equal the $0.07 a share. While we are disappointed with our results, they are a clear reflection of the difficulties surrounding the home building industry today. Notwithstanding the challenges which we face, we continue to employ a strategy, which we believe is the right strategy for this time and one that will ready M/I homes for the eventual improvement in our industry.

Our predominantly defensive operating strategy is aimed at reducing overhead and other costs, significantly curtailing land purchases and land investments and strengthening our balance sheet. For the first nine months of 2007, we earned $13 million pretax from operations. Moreover, we have seen our bank debt reduced from $410 million at the beginning of the year to $255 million at the end of the third quarter. And during that same time frame, we saw our debt-to-CAP rate fall from .46 to .40.

As mentioned in today's release, we expect to deliver 3,000 homes this year and to further reduce our debt levels to below $200 million by year's end. Our strategy is primarily defensive. We continue to focus on those offensive operating initiatives which we believe are necessary for a long-term success. These include the continued improvement of our customer experience, better utilization of the internet as a sales and marketing tool, refinement of various quality processes, as well as studying those markets that we believe can provide growth opportunities for M/I homes as conditions improve. No one knows when market conditions will stabilize. We have, however, been consistent in our view that things are not likely to improve until some time in 2009.

In the meantime, we will remain focused on cost production and cash flow and steadfast in our commitment to provide a first-rate customer experience and deliver a quality home. Now, let me briefly review our regions. The midwest continues to be challenging due primarily to poor job growth. All three midwest markets, Columbus, Indianapolis and Cincinnati continue to be down in single family permits year-over-year. At the end of the quarter we owned just over 6,500 lots in the midwest compared with 7,600 a year ago. This corresponds to a 14% decrease.

Currently our gross margins on new orders in the midwest range in the 12% to 14% range and we expect to deliver about 1,400 homes in the midwest this year. Our Florida region experienced a slight increase in new contracts in the third quarter, although 2006's third quarter was off by over 50% from 2005 so we got the benefit of the favorable comparison, but we will take it. There continues to be significant pricing pressures in this market and contain -- and cancellation rates continue to be high in Florida, about 45% for the quarter and about the same rate here today. Tampa, up for the quarter, was doing pretty good but has been hit hard by cancellations recently although the operating contribution in terms of profit for the year is better than we had expected. Orlando had a slight improvement in new contracts for the quarter but conditions there remain challenging. Homes delivered for the quarter in year-to-date for our Florida region were down about 33% from prior year levels. In Florida we have reduced our own lot inventory during the year by approximately 14%. We now own 7,700 lots in Florida versus 9,000 at the end -- or at the beginning of this year. And for the year we expect to deliver, approximately 900 homes in Florida. At the present time our margins on new orders hover at around 15%.

In the mid-Atlantic region, new contracts in homes delivered increased approximately 30% and 35% respectably on a year-to-date basis compared to last year. Charlotte and Raleigh markets are still faring better than other markets; however, let's be clear we are seeing a slow down there as well. D. C. has slowly begun to see the existing inventory levels reduced; however, conditions in the greater D.C. markets still remain tough. Homes delivered on the Charlotte market increased approximately 40% year-to-date compared with last year. And on a positive note, our Raleigh operation continues to grow. We opened a couple of new communities this quarter as planned, sales have increased 55% year-to-date compared to the same period in 2006. Backlog units in Raleigh are up 75% year-over-year. In Maryland and Virginia, new contracts have more than doubled for the quarter in year-to-date, and we currently estimate that we will close around 800 homes in the mid-Atlantic region this year.

Our margins on new orders are 16% to 18% in Charlotte and Raleigh and around 15% in greater D.C. Now, I will turn things back over to Phil to review our financial results.

Thanks, Bob . New contracts of 561 for 07 third quarter were 2% below last year's 571. In comparison, new contracts declined by 10% year-over-year in the second quarter and 17% in the first quarter. For the quarter, traffic increased 6% and the cancellation rate was 38%. As for the monthly details our sales were up 4% in July, while traffic was up 21%. Sales were down 35% in August while traffic was flat, and our sales were up 30% in September and traffic was down 4%.

In September, we offered a be confident mortgage special on our specks which featured a below market rate 30-year fixed mortgage. Overall, gross new contracts were down 7% for the quarter. Our active community decreased 6% from our peak of 170 a year ago to 159 today. To break down by region is 76 in the midwest, 46 in Florida, 37 in the mid-Atlantic.

We continue to reduce our midwest communities and slightly increase our Carolina communities. Homes delivered in 07 third quarter were 787, declining 15% when compared to last year's 927. We delivered 46% of our backlog this quarter compared to 32% last year. Revenue in the third quarter year-to-date declined 20% when compared to 06. The decrease in revenue for the quarter was primarily due to a 15% decline in homes delivered and as average sale price decrease of 6% to $295,000. In the third quarter we recognized pretax impairment of $32.3 million which includes our JV investment with respect to approximately 3,400 lots in 22 communities. As was the case in the prior quarter, these impairments primarily occurred in our Florida and mid-Atlantic regions with 70% from communities in our Florida market.

Over the last five quarters we have incurred pretax land and investment-related impairment charges of $171 million. $29 million in the Midwest, $67 million in Florida and $75 million in the mid Atlantic. This write off impacted 74 communities or 47% of our active communities today. We continue to analyze our housing inventory and investments this quarter. It is possible depending on market conditions that the company will incur additional impairment charges in the future. For the nine months ended 9/30/07, total pretax charges including land related impairment charges, preacquisition cost for land and lot deals we are no longer intending to pursue and write off of intangible assets were $107 million, broken down as follows, $100 million for impairments, $2.2 million for abandoned land and lot deals, and $5.2 million for intangible assets. Our gross margin exclusive of the impact of impairment charges were $19.6 for the quarter and $20.9 for the nine months ended 9/30/07. In this comparison, $24.5 and $26.4 for the quarter and year-to-date last year. Our estimated gross margin and backlog today is about 18% and we continue to see pressure on our margins.

During the quarter in year-to-date we incurred losses on land sales of $6.5 million and $7.6 million respectfully. These losses which relate both to land that has been sold and land currently held for sale included $7.7 million and $10.4 million of impairments respectfully. This compares to profit last year in the same periods of $1.7 million and $2.8 million which were both inclusive of a $1.9 million impairment taken in the third quarter of 06. The loss for the quarter and year-to-date largely relates to impairments taken in the Florida region.

We currently have $72.6 million of land held for sale on our balance sheet with $54.7 million under contract. G&A costs in 07's third quarter decreased $400,000 dollars and as -- as a percent of revenue increased to 10.1% from 8.2% in the prior year quarter. Year to date, G&A costs decreased $1.1 million and as the the percent of revenue increased to 10.4% versus 8.5% last year. The dollar decrease for the third quarter is primarily attributable to $1.1 million decrease related to a reduction in payroll and variable compensation expense and $1.8 million decrease in write offs of abandoned land transactions. These decreases were offset in part by $1.8 million of higher cost related to our investment in land, such as real estate taxes, site maintenance and homeowners association dues. G&A costs is a percent of revenue prior to severance cost, abandonments and write offs was 9.7% for the quarter and 9.1% year-to-date. Our head count at 9/30 is less than 900 versus 1,100 a year ago and our peak head count was 1,200.

Selling expenses for the quarter and nine months ending 9/30/07 increased 140 and 80 basis points respectfully 8.5% and 8.3%, and from a dollar perspective, selling expenses for the nine months decreased $7.3 million primarily as a result of volume decreases. Overall, our third quarter SG&A expense decreased $1.4 million; however, as a percent of revenue increased to 18.6% in the third quarter 07 and increased to 18.7% year-to-date. We are constantly monitoring and working on patrolling and reducing these expense levels. Operating loss in the third quarter of 07 was negative 12.3% of revenue after the nine months ended 9/30/07 was a negative 12.0% of revenue compared to income of 8.6% for the third quarter of 06 and 10.2% for the nine months of 06. Exclusive of $33.4 million and $109.3 million of impairment, abandonment, write off and severance charges, operating margins were 1.4% and 3.6%. Interest expense increased $1.4 million for both the third quarter and the first nine months of 07 compared to the same periods last year.

The increase in the third quarter was primarily due to $3.8 million decrease in capitalized interest as we have less land under development when compared to third quarter of 06. In addition, our quarterly weighted average borrowing rate increased to 8.1% from 7.4% a year ago and we incurred $500,000 of expense for the write off of capitalized debt cost when we amended our credit facility this quarter. This increase was partially offset by a $3.5 million decrease due to the decline in weighted average borrowings from $669 million in 2006 to $479 million this year.

We have $40.5 million in capitalized interest on the balance sheet at 9/30/07 compared to $34.5 million last year which is 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. Our overall income tax rate for the the third quarter and nine months ended 9/30/07 is $37.9 and $38.2 compared to $33.6 and $33.7 for the same periods last year. We incurred a $21.7 million net loss before preferred share dividends in our third quarter.

The company's net loss after preferred share dividends of $2.5 million with $24.2 or $1.73 per common share compared to net income of $15.2 and $1.08 per diluted share in last year's third quarter, and the company reported a net loss after preferred share dividends of $64 -- $64.5 million for the first nine months of 07 or $4.62 per common share compared to net income of $49.8 million or $3.51 per diluted share the same period a year ago and included in the company's 07 year-to-date loss are pretax charges totaling $109.3 million $4.86 per common share impact. For the third quarter we incurred a net loss before preferred share dividends of $21.7 million. The company's net loss after preferred share dividends of $2.5 million was $24.2 million compared to 2006's third quarter of net income of $15.2.

In year-to-date, we incurred a $59.7 million net loss compared to 2006's year-to-date and net income of $49.8. And for the third quarter, we had a loss per common share of $1.73 and for the first nine months we had a loss per common share of $4.62. And these per common share results include $1.49 and $4.86 per common share for the impact of previously mentioned charges including severance incurred during the quarter and for the first nine months ending 9/30/07. And this compared to last years earnings per diluted share of $1.08 for the third quarter and $3.51 for the first nine months of 06.

That covers the income statement. Now I will turn it over to Paul Rosen to address our mortgage company results.

Thank you, Phil. Mortgage and title operations pretax income decreased from $2.4 million to 2006 third quarter and $2 million in the same period of 2007. The change was partly the result of a 12% decrease in loans originated from $625 in 2006 to $549 in 2007. Additionally, financing being offered to M/I homes customers and competitive market conditions contributed to lower margins.

Loan-to-value on our first mortgages for the third quarter was 85% in 2007 compared to 80% in 2006's third quarter due to fewer second mortgages. For the quarter, 90% of our loans were conventional with 10% being FHA/VA. This compares to 89% and 11% respectively for 2006's same period. The FHA maximum mortgage limits and the markets that we operate can range from $200,000 in Indiana and North Carolina to $363,000 in Virginia and Maryland.

Approximately 7% of our third quarter closings were adjustable rate mortgages, this compares to 29% in the third quarter of 2006, 19% of our first, 12% of our second, and 7% third quarter 2007 applications were adjustable rate mortgages. Mortgages closed by M/I financial during the third quarter, 11% were interest only loans. This compares to 17% in 2007 second quarter. The percentage of customers that received down payment assistance in the third quarter increased to 7% versus 6% for the same period in 2006.

Overall, our average total mortgage amount was $245,000 in 2007's third quarter.

The average borrower credit score on mortgages originated by M/I Financial was 726 in the third quarter of 2007 compared to 714 in 2007's second quarter. These scores compared to 732 in 2006's third quarter to 719 in 2006's second quarter. The sell our mortgages along with their servicing rights.

In conjunction with the sales, we also enter into agreements that is guarantee certain purchases if we will repurchase a loan if certain conditions occur. Primarily, if the mortgagor does not meet those conditions of the loan within the first six months after the sale of the loan. Loans totaling approximately $134 million were covered under the above guarantees as of September 30, 2007. A portion of the revenue paid to M/I Financial for providing the guarantees on the above loans which deferred at September 30, 2007 and will be recognized in income when the financial is released from our obligation under the guarantee.

In 2007, we have not repurchased any loans.

In the ordinary course of business, we have provided indemnification to third party investors on certain loans. The total of these indemnified loans were approximately $2.4 million as of September 30, 2007. Company has accrued management's best estimates of the possible loss on the above loans. Our mortgage operation captured about 77% of our business in the third quarter compared to 2006's 80%. We believe there will be continued pressure on our capture rates 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.

Next to address subprime and alternative mortgages. We define subprime mortgages as conventional loans with a credit score below 620 or government loans with a score below 575. Alternative loans are those that do not fit into the conforming category due to a variety of reasons, such as documentation, residency or occupancy.

The third quarter of 2007, 6% of our closings fell into the subprime category, approximately 8% of our third quarter closings were in the alternative category with the majority of these being brokers. We do not have statistics on the percentage of subprime and alternative loans in the 23% that we did not capture in our mortgage operation. Now, I will turn this back over to Phil.

Thank, Paul. As far as the balance sheet, all amounts and percentages I discussed include the impact of the charges we have talked about. Home building inventory at 9/30/07 decreased $287 million or 21% below last year. Our total unsold land investment 9/30/07 and $614 million compared to $829 million at 9/30/06. Raw land and land under development values decreased 32% and 59% from a year ago and finished unsold lots increased 2%. In 9/30/07, we had $169 million of raw land, $98 million of land under development and $347 million of finished unsold lots. The market break down of our $614 million of unsold land is $211 million in the midwest, $236 million in Florida, and $167 million in the mid-Atlantic region.

In the third quarter we purchased $6 million of land, our current estimate for 07 land acquisition is $26 million compared to $164 million last year. In the majority of our 07 land purchases are in our Carolina market. In 9/30/07, we controlled 18,989 lots. We owned 16,767 and controlled an additional 2,222. This compares to prior year total controlled of 22,465 where we owned 18,919 and controlled an additional 3,546. Our peak owned lots were 21,318 at March 31, 06. Our current level represents a 21% decrease. The 9/30/07 mix of lots owned are 39% midwest, 46% Florida, and 15% mid-Atlantic.

All numbers include our prorated share of joint ventures and exclude lots under contract to sell to third parties. We have approximately $9 million at risk in deposits, letters of credit and preacquisition costs at 9/30/07 which covers our lots under control and we continue to reduce our land position. In 9/30/07 we had $43 million invested in joint ventures with approximately $27 million of this being in Florida. These JVs are for land acquisition and develop purposes and all with home building partners.

Three of these ventures have third party financing and are conservatively leveraged with approximately 60% debt and 40% partners equity. During the quarter, we wrote off $6.1 million for impairment charges related to our joint ventures. Also, one of our three outside finance joint ventures has a loan to value requirement and we were recently notified of an approximate $3 million reduction in the appraised value. Honors and our J.D . partners current plans are to make this capital contribution in the fourth quarter.

At the end of the quarter, we had $101 million investment in specs, 224 of which were completed and 360 specs in various stages of construction for a total of 584 specs. This translates into about 4 specs per community. Of the 584 specs 246 of the units are in the midwest, 198 are in Florida and 140 are in the mid-Atlantic. We had 636 specs and 609 specs at the end of the first and second quarters. Our customer deposits were about 3% in 9/30, about the same percentage as a year ago. In 9/30/07 there was $255 million outstanding under revolving credit facility which matures in October 2010 and our current borrowing base excess capacity is $277 million. This compares to $491 million outstanding at 9/30/06 and $410 million at 12/31/06. We expect this balance to continue to decline to below $200 million by the end of 07.

We generated $11 million of cash from operations during the third quarter and have generated $74 million year-to-date. Long term debt at 9/30/07 totaled $482 million compared today $708 million a year ago. This amount includes $200 million of public [senior] notes that is mature in 2012. Home building net debt to equity was 67% in 9/30/07 versus 107% a year ago. Home building net-debt-to-cap improved to 40% versus 51% a year ago, and 44% at 06's year end. Our targeted net-debt-to-cap ratio was 50% or lower and during these challenging times we are focused on having a less leverage balance sheet. Our rolling 12 month interest coverage for the quarter was 2.8% times EBITDA. Our quarterly interest coverage was 1.1% times EBITDA. EBITDA for the quarter was $9.4 million, and interest incurred for the quarter was $8.7 million compared to $12 million in 06's third quarter.

During the quarter we amended the terms of revolving credit facility reducing our commitment aggregated commitment from $650 million to $500 million in adjusting our interest coverage ratio requirement. We did not repurchase any treasury shares during the third quarter. At year 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 capital and current prices, which are approximately 40% of our current book value per common share, we will continue to be thoughtful about future buy backs so as not to undermine strength of balance sheet and credit quality. We will review repurchase program at our quarterly board meetings and currently have $7 million of repurchased authority. Total shareholders' equity at 9/30/07 is $652 million with a book value per common share of $39.

In summary, as Bob stated we continue to see challenging market conditions and we anticipate this environment to continue. As our press release mentioned we continue to estimate that we will deliver approximately 3,000 homes this year; however, due to current market conditions, it makes it very difficult for us to predict new orders, margins or four year results. We are very focused on reducing our inventory, expense and debt levels. This completes our formal presentation, we will now call for any questions or comments. Melissa?

(OPERATOR INSTRUCTIONS) Your first question is coming from Ivy Zelman with Zelman and Associates

Hey, good afternoon guys.

Hey Ivy.

Nice to be back on the conference call. I wanted to understand the outlook a little bit if you could help us, the cash flow for the quarter generating $11 million in cash was below our expectations but I'm relatively bullish on the opportunity to generate cash flow in the fourth quarter and one of the things that would help me gain confidence if you could walk us through. I think Phil, you tried to, sort of how much money is already put in the ground, that's already been developed and even homes that have been partially built and those homes that have already been completed, but obviously reduce the need for future cash going in the ground. And if you can kind of give us some idea of what your portfolio looks like, that would significantly change the delta in cash going in the development that had been a drain this year and why it would significantly hopefully go down in 08 allowing you to generate a lot more cash.

Of course we are not getting into any type of cash projections for 08 at this stage. As far as what's happening to us in 07, most of our --

I realize you can't get into projections but am I right in my thought process if I understand that a lot of the money has already gone in the ground and you don't have a lot more to continue to expend on new ground?

Exactly, we talked about how little land we are buying this year versus last year. We are also being very careful in bringing anything out of raw into development. What's happened to us a little bit is we have been spending some money this year moving land from land under development to finished lots, Ivy, also, in the fourth quarter we should be closing more homes, also the spec homes have been progressing through the pipeline. We are closing more and more specs which shows from our percentages also.

So we did not generate a whole lot of cash in the third quarter even though we did not buy that much land. But that was really more in the backlog being built out further, also moving specs through the process and finishing a few lots. But again, we think we will be generating more cash because we talked about, we are borrowing like $255 from the banks at the end of the third quarter and expecting that to be below $200 by the end of the year. But it is really -- more of our closings.

Now looking at -- Hey Phil, just to understand that obviously EBITDA it is not a good understanding of what your cash flow is on a per unit basis. If you could explain what you are getting, assuming you are not making any money on the house, should we be using something in the magnitude of 20% of revenues for the cash recovery per unit, assuming that you are not making money on the house and per spec units that you have already completed, you obviously will get more back because you have already incurred the cost on the stick and bricks and the other expenses related to it.

We had, it kind of comes out to what the cost of the lot is. So you could probably look at it at about 20%, Ivy. We talked about wanting to deliver approximately 3,000 homes. We hope that it is actually a little more than that, but the best way to look at it is, really, the lot -- the lots that are coming out of the system through closing. That's where where the majority of the cash flow is coming from. We figure everything else will pretty much be a push between building out the inventory, developing lots and everything else.

Right. Good luck. Thank you.

Thanks. Any other questions?

Thank you. Your next question question is coming from Alex Barron with Agency Training Group. Please go ahead.

Hi, Bob, hi, Phil.

How are you, Alex?

Great, thanks. I wanted to ask you guys, I guess your sales pace like everybody else's, has kind of dropped over time and I guess in response you guys have done all sorts of incentives. Can you help me just kind of understand, at what -- what triggers I guess the next level of incentive at what minimum sales pace do you kind of say that's too low, we have to -- have to, we have to do something here.

Well we are doing something now, and Phil touched on it briefly Alex What we are doing and what we have been doing is a combination of things. First of all, we are constantly reviewing every one of our communities in hopes of trying to get pricing where we think the market is. It is very difficult under these conditions because there's just so much volatility and so many targets that are moving at the same time.

But in terms of what we are advertising above and beyond all of that, we have been primarily leading with what we believe is very favorable 30-year fixed rate financing on what we call express delivery or spec homes. We are marketing them with a 4 7/8%, 30-year fixed rate and we have got other below market rates we utilize on new builds. That's primarily what we are doing and we are doing it right now. We are continue going to continue to do it as long as it is working and it is working okay. We think things would be worse if we didn't do it. So that's why we are continuing to do it.

Got it. But I guess if you had a minimum number of homes that you are trying to sell per community, what is that, at least two or three or --

Well, I think when you look at our results in the third quarter, we closed almost 800 homes and lost a couple of million dollars from operation so obviously that's not getting a (inaudible) to break even from operations.

In normal situations, we would like to have at least two per month, per community at a minimum of 20% gross margin but right now under today's environment we are trying to balance off what it takes to get that and also, as Ivy brought up, we are focused very much on cash flow and the balance sheet. So we are in the subdivision business, Alex. We look at it every Tuesday. We would sure like to have at least one per month per community. Two would be better, but you have to balance off what's in the marketplace and what's going on.

And about that incentive I was going to ask you, that 30-year incentive, how much is that costing you, I guess how should I think about it as a percent of the ASP and where does it flow through in the income statement?

The promotional we have been running, again what, for express delivery homes and when we price our houses, we build in a certain amount for financing. So the divisions bear some of that cost through their margins.

Also, since most of those transactions are going through the mortgage company, our mortgage company also shares in that cost. So it primarily goes through the cost of sales line and the mortgage company line but also, Alex, we are doing some marketing and advertising as far as we are doing some radio, some newspaper and those types of things. So that's also increasing our SG&A. So it kind of goes through everywhere a little bit.

All right. Got it. Thanks. I am going to get back in the queue.

Thank you. Your next question is coming from Joel Locker with SBN Security.

Hi guys, how are you doing?. I just have a question, just a follow up on Ivy's question on the inventory. If you have $347 million in finished and if you take a ball park figure of 25% of revenues is actually the lot cost, you come up to $75,000 a lot which leads you to about 4,600 finished lots. Is that a good way to look at it? Which would give you six quarters worth of finished lots?

If you look right now, Joel, in our company, our finished lots average about 65,000. Yes, you are in the ball park.

Right, so I mean, that's seven, seven quarters or so of finished lots you technically wouldn't have to put any more money in the raw land or the other land under development, so the cash flow under that thesis would be a lot stronger going forward in 08 even if you are selling houses at a break even or at a loss.

I understand what you are saying. I mean and obviously, also when you look at the finished lots, we are hoping not only to work through that through the home building operations, but we are also working very hard to sell some of those to outsiders.

Right.

But on the other side of that, again, not getting into 07 or 08 specifically, I mean, we will continue to buy some raw land, we will continue to buy some finished lots in some markets like the Carolinas where we don't have a whole lot of land. We also have cash dividends to pay.

Right.

There will be some raw land being developed but you cannot look at it just as simplistically as finished lots, but that is a big piece of it.

And just on your G&A,, I guess SG&A overall is kind of running around 12% to 12.5% , say like in 2002, 03 and now it is up to 18.6% for the third quarter. I mean, when do you think that will start trending back down just to maybe mid-teens or something like or --

In some respect the percentages are deceptive because our revenues have dropped so much. In an absolute basis our SG&A has actually come down and continues to come down. One of the things that I think also skews the numbers, Joel, for us, is the fact that before the cycle turned, we were internally developing between 80% and 90% of our own land. We have a lot of owned land and what I will call the overhead costs associated -- associated with land which are unavoidable in terms of real estate taxes and HOA fees, ongoing lot and site maintenance, all of these run through the SG&A line, and compared to those builders who have -- don't have nearly as much as a percentage of their operation invested in land. It slightly skews our percentages.

I don't know if you want to add anything --

Yes, when you look at the number, I think I'm with Ann Marie in saying about 20% of our G&A is really due to our land cost, Joel.

Right.

Again, which is real estate taxes, HOA fees and those types of things. We are obviously trying to work through our land inventory by either selling and building it or whatever, also trying to sell some of the lots. Also, in certain environments we are protesting, trying to get the basis of some of that property reduced.

Right.

Another thing, we have been pretty successful in reducing our raw land, successful in reducing our land under development, but as you get to finished lots that's a higher tax basis also.

You need into that to build the houses on, to get it through the pipeline.

Right. Do you think it will --

Just hard to predict because one of the big pieces as Bob said is the revenue side and when you look at our backlog, it is down quite a bit from the prior year. We have been holding specs down fairly well our specs have actually have come down a little bit the last two quarters. We are working hard on reducing the dollars. It is hard to say when the percentage is going to come down much because the revenue site is so unpredictable.

So, unless the revenue picks up it is pretty hard to right size your G&A, I mean, just overall, even if you go into 08 even if you have the lower head count coming through. And once all that --

Well, I don't know if I would go quite that far because candidly, with what we are still seeing in the market, I think we have more overhead reduction that will be coming. And, at some point you can only cut so much, but I think we do have more overhead reduction coming in the fourth quarter and probably in the first quarter of next year.

Right. And just one last question, on the impairment reversals, how many impairment reversals, what was the dollar amount in the third quarter that came -- came through the income statement from prior quarters?

About $5 million in the third quarter and $14 million year-to-date.

$5 million in the third quarter. Alright, thanks a lot. I'll jump back --

Thanks Joel.

Thank you. Your next question is coming from Scott Mack with AAD Capital. Please go ahead.

Good afternoon, everybody.

Good evening, Scott.

I was wondering if you could, you mentioned this in the prepared remarks, some of the strategic priorities, just in terms of taking a look at the home building process and presumably with an eye of taking cost out of that process. If you could talk a little bit about some of the things you are doing and maybe some of the cost savings per home that you are able to generate.

Well, it falls into a number of different buckets. One of them is working hand in hand in a collaborative way with some of our national account partners to reduce cost and to price protect. The other one is working with the individual subcontractors and the material suppliers that we don't have national relationships with but it is done locally market by market and in year-over-year, we probably have seen on average somewhere between 5% and 7% reduction in sticks and bricks as a result of those initiatives, but those initiatives continue. We also continue to try where we have the leverage to do so, to renegotiate that which we are paying on lot take down agreements where we believe it is in our best interest to continue to take the lots. The other thing is a reduction in building days.

We have materially reduced the number of days within which to build new models and also specs by almost 50%. A year ago, it was taking us on average in most of our markets over 120 to 150 days to build a new model or spec. Today, we're --our goal is to complete the construction within 60 days. There is probably some other things, but those are the main items. And those are significant.

Can you give me an idea just, I mean when you wrap those up, just in terms of the percentages, the cost to build a home?

Well, the one percentage that I did give you I think is pretty close to 5% to 7% reduction of our cost. The other cost benefits that accrue as a result of constructing spec homes and we don't, we have never had a lot of spec homes but we still do have them and are still are utilizing that selectively as a strategy to work our inventory, but when you get a spec home built quicker and get it to the street faster and as a result hopefully produce a closing quicker, you certain -- you understand those benefits as well.

And I kind of want to attack the cash flow question, maybe from a different angle. Just in terms of the first nine months of 2007, can you quantify or tell us how much money you have put into land and land development and you mentioned there will still be an on going need to do that but just to directionally or in order of magnitude, talk about how it might change going forward?

From a land standpoint as far as purchasing raw land, we talked about last year we bought $160 million of land. This year so far we have bought about $20 I think and we plan to buy another $5 or so, for $26 for the year. So we've not spent much money on raw land. We never really get into exposing about how much did we put in land under development. That's -- Some of it, but most of it is raw. We never have gotten into that.

Again, you have to look at other places you are using cash, you are building your backlog, you are putting dollars into specs, you are paying dividends, and again the cash flow statement gets into some of that. But again the biggest way we are generating cash is working through those finished lots.

Okay. Thank you very much for your time.

Thanks a lot.

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

Hello, again, Alex.

Hey, thanks for taking the follow up. Talking about specs, I guess just conceptually I wanted to understand, I know obviously the market is slow and all of that, but what is, I guess more philosophically, what is your perspective on specs, is it kind of a necessary evil in this point in the cycle or is it something that if -- that you wish you could just kind of get rid of all of them and not have to, in other words, are they just accidental or are you guys creating them on -- somewhat on purpose to create cash flow.

Both. I mean, let me say this first, until maybe you can -- you can add onto this. Historically, M/I homes has probably been among the most conservative of all home builders when it comes to voluntary specs, whereas most builders would at any point in time run between 20% and some as high as 50% of inventory on specs, those are voluntary and M/I, it was generally somewhere between 10% and 15% is the maximum.

Today, of course you have got voluntary specs because of increased cancellations including those occur frankly, in some cases as late as the closing day, we have got some involuntary specs. Phil, I don't if you want to add --

I mean, it is something that we manage very closely on a region basis. We adjust our spec levels as we need to. We talked earlier in the call about finished lots that we have, and we think by keeping a certain amount of specs out there, and again, as Bob said, we tend to be lowest in the business, three or four communities, we think by keeping those specs out there, we do get through our lot inventory and also allow us to free up some cash. Also ,one of the issues today is there is a lot of people in the market with houses to sell. You need to take that into account also as you attack your sales program but it is something we do manage. We think especially with the fight for where it is, it is something that is necessary to us, but again we think we play it as conservative as anybody does.

Got it. And then as it pertains to your land, I was noticing your number of lots owned and option in the mid-Atlantic region is up sequentially and I think you guys said it was probably North Carolina. So can you give me some, can you confirm that and can you give me some idea of what the breakdown is between D C. and Carolina in number of lots.

Well, when you look at owned lots at 9/30/07, North Carolina and D.C., the mid-Atlantic was 2,474, Alex. When you look a year ago it was 2,846. So it is actually down from where it was a year ago. It was 2,413 at 6/30/07 so it is up like 60 lots but it is just up slightly. We probably are still a little land shy in Raleigh and Charlotte and again, as we said before, that's kind of where we are buying things now.

Cautiously, though because those markets have started to slow and it is just, it is a different day.

Yes, I mean, Bob talked about It was our current estimate to deliver about 800 homes there. We owned about 2,400 lots so we have on our books today a current run rate about a three year supply.

And are those markets roughly half and half, equal in size in terms of lots?

Which one, Charlotte and Raleigh?

No, the Carolinas versus D.C.

He is going to keep asking that until I answer it. You are consistent, Alex. There actually, it is more in the neighborhood of 60% in the Carolinas, 40% in D.C.

Got it. And one more if I could, did you give the community count by region?

Yes, I did.

Okay. I will go through the transcript then. Thank you.

That's okay. I will give it to you again while you are here. When you look at our community count, we actually have 159 today, 76 in the midwest, 46 in Florida, and 37 in the mid-Atlantic.

Thank you, Phil. Thanks, Bob.

No problem.

Thank you. Your next question is coming from Joel Locker with FBN Securities. Please go ahead.

Just had a quick question on the line out on the land sales you had what, $7.7 million that ran through the land sales this of impairment? In the third quarter?

Yes.

How much -- how much did you have in the second quarter? Because I didn't have anything in my model that ran from that column. It was a $4.7 million in revenues, but a $2.1 --

I don't have that handy, Joel.

You don't?

The number in here is -- I don't know --

I don't know if you heard that --

$10.4 million you said, year-to-date --

No, that was the year-to --

Right, year-to-date, $10.4 million; right?

Yes. I don't have it --

It might have just been the $2.7 because I think it was mostly all second quarter, but -- All right. I will -- that's good enough. Thanks a lot.

Thanks.

Thank you. There appear to be no further questions. I would like to turn the floor back over for closing comments.

Thank you very much for joining us. And we look forward to talking to you with year-end results. Thanks.

Thank you. This does conclude today's M/I Homes third quarter earnings conference call. You may now disconnect.