M/I Homes Inc (MHO) 2007 Q4 法說會逐字稿

Good afternoon. My name is Jennifer, and I will be your conference operator today. At this time, I'd like to welcome everyone to the M/I Homes yearend earnings conference call. (OPERATOR INSTRUCTIONS.)

It is now my pleasure to turn the floor over to your host, Mr. Phil Creek. Sir, you may begin your conference.

Phil Creek. Thank you very much, and thank you for joining us from Columbus, Ohio. Joining me on the call today 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.

As to forward-looking statements this presentation includes forward-looking statements as 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 releases for other factors that could cause results to differ. Be advised that the Company undertakes no obligation to update any forward-looking statements made during this call, the audio of which will available on our website through February 2009.

I will now turn the call over to Bob.

Thanks, Phil. And good afternoon, everyone.

Conditions continue to be challenging in most of our markets, and we believe are likely to remain so throughout 2008. For nearly two years now, we have been engaged in what we refer to as a predominantly defensive operating mode, focusing on improving our balance sheet, rightsizing our operation, reducing our owned lots, our operating costs, and reducing our debt levels.

Market conditions are clearly difficult. Demand is weak. Buyer confidence is low. And the difficulties surrounding the used home market continue to serve as a major barrier for new home purchases.

In the face of what many feel are unprecedented industry conditions, we believe that M/I Homes has made significant progress on a number of fronts during the past year, all of which will serve to better position our Company as we look towards the future.

First of all, we successfully reduced our owned lots during 2007 by nearly 30%, generating cash from land sales of $89 million, and net cash from homebuilding operations of an additional $113 million.

In addition, as a result of our land sales we were able to monetize the loss on sales using carry backs for Federal income tax purposes, and expect to receive a $50 million check from the Federal Government during the first quarter of this year. Second, during 2007's first quarter we successfully completed the issuance of $100 million of preferred stock, which we believe improved our capital structure significantly.

The result of these first two points that I've made was that our net debt to cap now stands at [.33] versus [.44] a year ago. We plan to further reduce our inventory of owned lots with additional land sales throughout 2008, along with limiting our land and lot purchases and land development spending.

We expect to generate positive cash flow during the year, which should completely pay-off the debt under our homebuilding credit facility by the end of 2008. The only other debt which our Company has is senior notes, and these notes are not due until 2012.

We have also been successful in reducing our overhead structure and aligning it in accordance with today's demand. We have since our peak levels in early 2006 reduced our Companywide workforce by over 40%, and before impairments and other special charges I do want to point out that we were profitable during every quarter of 2007.

We continue to make progress on a number of strategic initiatives, which we believe are important to our Company's future success. These relate to the customer experience and they relate primarily to the customer experience, where we have implemented a number of systems to streamline our business processes and give us more visibility into customer trends.

With our net worth in excess of $580 million and minimal off balance sheet exposure, we believe that M/I is well positioned to manage through this current difficult cycle. In the meantime, we will remain focused on those key operational aspects of our business, namely, premiere locations, building quality homes, and taking care of our customers.

Before I turn things back over to Phil, let me just make a few comments about our three regions. First, the Midwest. Conditions in the Midwest continue to be challenging due primarily to very poor job growth. Three of our Midwest markets: Columbus, Cincinnati, and Indianapolis, continue to be down in single family permits this year. New contracts and homes delivered in our Midwest operations were down around 20% when compared to the same periods in 2006. We anticipate that new contracts will continue to be challenging in 2008.

At the end of 2007, we owned just over 6,400 lots in the Midwest versus approximately nearly 7,400 lots a year ago, which would represent a 14% decrease. We continue to work towards reducing our Midwest investment levels. Presently, our gross margins on sales in the Midwest range from 12% to 15%.

Our Florida region, in our Florida region the market continued to soften in 2007 with new contracts and homes delivered decreasing approximately 10% and 40%, respectively, for the year. There continues to be significant pricing pressures and cancellation rates continue to be high in our two Florida markets.

At December 31, 2007, we owned just over 5,300 lots in Florida, versus 9,000 lots at the beginning of 2007. This would correspond to a lot count reduction of nearly 41%. The reduction was primarily a result of our publicized land sales of over 3,000 lots, and included substantially all of our West Palm Beach assets, which represented approximately 550 lots. We have been quite successful in reducing our Florida investment levels, and this bulk land sale represented a meaningful and important reduction in our land holdings in the Florida region. At the present time, our gross margins on new orders in the Florida region rank around or stand at around 12%.

Finally, the Mid-Atlantic region. New contracts and homes delivered in this region increased, increased approximately 10% and 25%, respectively, for the year when compared to the same periods in 2006. Our Charlotte and Raleigh markets continue to fare better than our other markets, while the DC market, as a whole, remains challenged.

At the end of '07 we owned just over 2,000 lots in the Mid-Atlantic region versus 3,000 lots at the beginning of '07, which would correspond to a 30% decrease. Our margins on new orders ranged between 16% and 18% in Charlotte and Raleigh and about 12% in the Greater DC market.

At this time, I'll turn the call over to Phil to review our financial highlights.

Thanks, Bob.

As we announced in December of '07, we sold substantially all of our West Palm Beach assets, and expect to exit the market by June of '08. The results of operations of our West Palm Beach Division have been classified as discontinued operations in accordance with Statement of Financial Accounting Standards No. 144, "accounting for the impairment or disposal of long-lived assets." And prior periods have been reclassified to conform with the current year presentation, and unless otherwise noted the information included in this conference call excludes Palm Beach and focuses on our results from our continuing operations.

First, new contracts. New contracts for the '07 fourth quarter decreased 23%. Our cancellation rate in the fourth quarter was 49%, compared to 59% in the '06 fourth quarter, and 37% in the '07 third quarter. Our traffic for the quarter decreased 25%. Our sales were down 34% in October, while traffic was down 27%. Sales were up 28% in November, while traffic was down 17%, and our sales were down 46% in December, and traffic was down 29%. Overall, gross new contracts were down 38% for the quarter. For the year our new contracts declined to [2452] or 12%, and our gross new contracts declined 18%. Our annual cancellation rate was 33% in '07, compared to 37% in '06. Our active communities decreased 12% from our peak of 166 at 9/30/06 to 146 today. Our breakdown today by region is 76 in the Midwest, 34 in Florida, and 36 in the Mid-Atlantic.

Our projection for 2008 is to be at about 144 by yearend. Broken down by region, 79 in the Midwest, which includes opening a couple of communities in Chicago, 29 communities in Florida, and 36 in the Mid-Atlantic. We delivered 70% of our backlog this quarter, compared to 55% in '06.

Revenue in the fourth quarter declined 23%, primarily due to a 23% decline in homes delivered, and an average sales price decrease of 7% to $298,000. This decrease is partially offset by a $12.1 million increase in third-party land sales, when compared to the prior year quarter. And revenue for the quarter decreased 20%, primarily due to a 19% decline in homes delivered, and an average sale price decrease of 14% to $296,000, and that was partially offset by a $9.5 million increase in third-party land sales.

Our results for the '07 fourth quarter include pretax charges which includes discontinued operations of $180 million related to homebuilding market conditions, including the Company's rationalization of its land portfolio, as we implemented our plan to reduce owned inventory and work our way through today's challenging environment. The impairment charges consisted of $83.5 million related to land and homebuilding assets sold, of which $43 million was related to the West Palm Beach assets, $19.9 million related to ongoing inventory, and $4.3 million related to our investment in joint ventures.

With respect to continuing operations we impaired over 5,000 lots in 34 communities in the fourth quarter. Some have been previously impaired, and this impairment encompassed both open communities and communities to be opened in the future.

Results for the year include pretax charges including discontinued operations of $207 million. The impairment charges consisted of $153 million related to inventories sold or held for sale, of which $59 million related to West Palm Beach assets, $42 million related to ongoing inventory, and $13 million related to the Company's investment in joint ventures.

With respect to continuing operations for the year, we impaired almost 7,000 lots in 85 communities. Over the last year-and-a-half we have incurred free tax charges, including discontinued operations of $279 million, and $64 million relates to discontinued operation. The impairment charges consisted of $155 million related to inventories sold or held for sale, of which $64 million related to West Palm Beach assets, $109 million related to ongoing inventory, and $15.5 million related to our investment in joint ventures.

And with respect to total impairments to date, approximately $165 million reversed in '07. Keep in mind that some occurred and reversed in '07, and approximately $140 million of the reversal for the year related to land sales.

At 12/31/07 of our [146] active communities, we have impaired 57 or 40% of our current active communities. We continue to analyze our housing inventory and investments every quarter. It is possible depending on market conditions that the Company will incur additional impairment charges in the future.

Our gross margin exclusive of the impact of the aforementioned inventory and investment impairment charges was 13% for the quarter and 18% for the 12 months ended 12/31/07, and this compares to 23% and 24% for the quarter and the year, last year. Our estimated gross margin and backlog is about 12%, and we continue to see pressure on our margins.

During the quarter and for the year prior to land impairment charges, the Company reported profit of $178,000 and $2.7 million on land sales, and corresponding '07 revenue was $42.8 million and $58.3 million. This compares to profit in 2006's fourth quarter of $6.3 million and $11 million for the year, with revenues of $31 million and $49 million, respectfully.

We currently have $8.5 million of land held for sale on our balance sheet, with $6.4 million under contract. We also had revenue from land sales and discontinued operations of $31 million for the year, primarily occurring in the fourth quarter.

G&A costs in '07's fourth quarter decreased $4.7 million and as a percent of revenue was 6.7%. Exclusive of severance and abandonment charges, totaling $4.5 million for the quarter, the percent of revenue was 5.3%. For the year G&A costs decreased $5.2 million, and as a percent of revenue was 9.2%. Exclusive of severance, abandonment and intangible write-offs, the percent of revenue for the year was 8.3%. The dollar decrease for the year is primarily attributable to a $4.4 million decrease related to a reduction in personnel costs, as well as a $7.7 million reduction in the level of profit based incentive compensation expense, and there was a $1.9 million decrease in the write-off for a band of land transactions.

Those decreases were offset in part by $4.9 million of higher costs related to our investment in land, such as real estate taxes, site maintenance, and homeowners association dues, and also $5.2 million of intangible write-offs related to charges taken in '07's second quarter. We continue to work very hard on G&A reductions. As we've stated, approximately 20% of our G&A is land related.

Selling expenses for the quarter and the 12-months ended 12/31/07 increased 60 and 80 basis points to 6.6 and 7.7 of revenue. From a dollar perspective, selling expenses for the 12 months decreased $10.3 million. This decrease was primarily due to lower volume levels.

Overall, our fourth quarter SG&A expense decreased $8.9 million and was 13.2 of revenue. Exclusive of severance, abandonment, and intangible write-offs the percent to revenue was 12% in the fourth quarter of '07 and 16% for the year. We continue to work on reducing these expenses, and have had additional workforce reductions in January and February of this year. Our headcount peaked at about 1,200. We currently employ about 700 people, down about 40%.

Interest expense decreased $1.1 million for the fourth quarter, and decreased $464,000 for the 12 months of '07 compared to last year. The decrease in the fourth quarter was primarily due to a decrease in weighted average borrowings from $694 million in '06 to $465 million as of 12/31/07, and this decrease was partially offset by a $3.1 million decrease in capitalized interest, as we have had less land under development when compared to the fourth quarter of '06.

Our quarterly weighted average borrowing rate remained relatively unchanged at 7.5%. Interest incurred was $8 million in the quarter versus $13 million in '06 this fourth quarter.

We have $29.2 million in capitalized interest on our balance sheet as of yearend, compared to $35.2 million at 12/31/06, which 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 under development and when houses are being built.

Our overall income tax rate was 39% for the fourth quarter and for the 12 months ending 12/31/07 compared to 41% and 35% for the same periods in '06.

Now, Paul Rosen will cover our mortgage results.

Thanks, Phil.

Mortgage and title operations, pretax income decreased from $4.7 million in 2006's fourth quarter to $1 million in the same period for 2007. The change was partially the result of an 11% decrease in loans originated from 908 in 2006 to 812 in 2007. Additionally, enhanced financing programs are being offered to M/I Homes customers. Competitive market conditions also contributed to lower margins.

Loan to value on our first mortgages for the fourth quarter was 85% in 2007, compared to 81% in 2006's fourth quarter, due to fewer second mortgages. For the quarter 90% of our loans were conventional, with 10% being FHA, VA. This compares to 91% and 9%, respectively, for 2006 same period. The FHA mortgage limits in the markets that we operate range from 200,000 in Indiana and North Carolina to 363,000 in Virginia and Maryland.

The 2008 trend indicates FHA financing has increased to approximately 30% of our business. Approximately 3% of our fourth quarter closings were adjustable rate mortgages. This compares to 29% in the fourth quarter of 2006. 19% of our first, 12% of our second, and 7% of our third, and 1% fourth quarter 2007 applications were adjustable rate mortgages. Of the mortgages closed by M/I Financial during the fourth quarter, 3% were interest only loans. This compares to 11% in 2007's third quarter and 17% in 2007's second quarter.

The percentage of customers that received down payment assistance in the fourth quarter decreased to 5% versus 6% for the same period in 2006. Overall, our average total mortgage amount was $253,000 in 2007's fourth quarter.

[The average borrower] credit score on mortgages originated by M/I Financial was 728 in the fourth quarter of 2007, compared to 726 in 2007's third quarter. These scores compared to 733 in 2006's fourth quarter and 732 in 2006's third quarter.

We sell our mortgages along with their servicing rights to a number of secondary market investors. The loans are sold on the best efforts and a mandatory basis. Based on loan value our main investors in the fourth quarter were Chase 41%, Citi Mortgage 26%, Wells Fargo 19%, and Huntington 6%.

In conjunction with these sales we also enter into agreements to guarantee certain purchasers that we will repurchase the loan if certain conditions occur, primarily, if the mortgagor does not meet those conditions of the loan within the first six months of the sale of the loan.

Loans totaling approximately $175 million were covered under the above agreements as of December 31st, 2007. A portion of the revenue paid to M/I Financial for providing the guarantees on the above loans was deferred at December 31st, 2007, and will be recognized as income as M/I Financial is released from our obligation under the guarantees. In 2007 we repurchased one loan.

In the ordinary course of business we have provided indemnification to third-party issuers on certain loans. The total of these indemnified loans was approximately $1.9 million as of December 31st, 2007. The Company has accrued management's best estimate of the possible loss on the above loan.

Our mortgage operations captured approximately 86% of our business in the fourth quarter, compared to 2006's 78%. A portion of the increased capture rate can be attributed to an enhanced fourth quarter financing promotion. However, we believe there will be continued pressure on our capture rate due to increased competition, that is the mortgage business overall remains slow. We continue to put programs in place that we believe will help our capture rate and help sell homes.

Next, I'll address subprime and alternative mortgages. We've defined subprime 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 conforming category due to a variety of reasons, such as documentation, residency or occupancy. In the fourth quarter of 2007, 5% of our closings fell in the subprime category, approximately 5% of our fourth quarter closings were in the alternative category, with the majority of these brokered. We do not have statistics on the percentage of subprime and alternative loans in the 14% that we did not capture in our mortgage operations.

Now, I will turn the call back over to Phil.

Thanks, Paul.

As far as the balance sheet, total homebuilding inventories at 12/31/07 decreased $295 million or 27% below last year. Total building sites owned and controlled as of 12/31/07 decreased 28% from a year earlier.

With respect to our lots under contract that we do not own, we have approximately $9 million at risk in deposits, letters of credit, and pre-acquisition costs at 12/31/07. Our total unsold land investment at 12/31/07 is $484 million compared to $773 million a year ago. Compared to a year ago, raw land decreased 44%, land under development decreased 55%, and finished unsold lots decreased 22%.

At 12/31/07 we had $127 million of raw land, $95 million of land under development, and $262 million of finished, unsold lots. Also, the $262 million of finished unsold lots represents about 4,800 lots. The market breakdown of our $484 million of unsold land is $202 million in the Midwest, $132 million in Florida, and $150 million in the Mid-Atlantic region.

In the fourth quarter we purchased $4 million of land. Our current estimate for '08 land acquisition is approximately $30 million compared to $23 million in '07. The majority of the '07 actual and '08 planned land purchases are in our Carolina markets.

As to land development expenditures, we currently estimate that we will spend about $35 million in '08 compared to approximately $100 million last year. At 12/31/07 we had $40 million invested in joint ventures, with approximately $25 million of this being in Florida. These JVs are for land acquisition and development purposes only, and all are with homebuilding partners.

We are 50/50 partners in three joint ventures with nonrecourse financing, and our partners are large public builders. These three ventures have a total debt of $75 million, with equity of $43 million or 37% equity and 63% debt. We have one joint venture that has financing on it that requires loan-to-value maintenance, and the outstanding debt balance on this JV is $15 million. We recently made a $1.5 million capital contribution related to that requirement. Also, during the quarter we recorded $4.3 million for impairment charges related to our joint ventures.

At the end of the quarter, we had $118 million invested in specs, 309 of which were completed, and 323 specs in various stages of construction, for a total of 632 specs. This translates into about 4 specs per community. Of the 632 specs, 284 were in the Midwest, 181 are in Florida, and 167 in the Mid-Atlantic. We had 717 specs at the end of the fourth quarter of '06. At 9/30/07 we had 584 specs, with an investment of $101 million.

As we've previously mentioned, we expect to receive a $50 million tax refund in the first quarter, as we carried back tax losses incurred in '07 to recover taxes we paid in '05. We currently have a $68 million deferred tax asset on our books. We believe this tax asset is fully recoverable and, therefore, have not recorded a valuation allowance.

Also, for your information, we paid about $45 million in taxes in '06. Our $500 million homebuilding credit facility matures in October 2010. We had $115 million outstanding at 12/31/07, and $45 million of letters of credit. The excess borrowing base capacity at yearend was $170 million.

We project that our borrowings under this facility will be zero by the end of '08. Cash flow that we expect to generate in 2008 includes our tax refund, cash from additional land sales, primarily in Florida, as we continue this strategic focus, reducing our owned lot inventory, especially finished lots, and reducing our spec levels.

Our most restrictive debt covenant currently is minimum net worth. Our current cushion is approximately $40 million. Our rolling 12-month interest coverage for the quarter was 1.6 times EBITDA, and our quarterly interest coverage was 1.7 times EBITDA. We currently estimate that we will be in compliance with the interest coverage covenant through 2008. We are having our semiannual bank meeting in March.

Under the restricted payments basket in our public senior notes at December of '07 we had about $95 million of cushion. We did not repurchase any Treasury shares in '07. At yearend we had 3.6 million shares in Treasury, and we currently have about $7 million of repurchase authority.

In summary, we continue to see challenging market conditions, and anticipate this environment to continue this year. We continue to be very focused on reducing our inventory levels, expense levels, and debt levels.

This completes our presentation. We will now open the call for questions and comments.

(OPERATOR INSTRUCTIONS.)

Your first question comes from Alex Barron of the Agency Trading Group.

Hey, good afternoon, guys.

Hey, Alex.

I know you gave the percentage of communities impaired, total I think you said 57%. I was wondering if you had a breakdown by region?

On the -- in the press release we disclosed impairments, dollar amount, Alex.

Okay.

And we've not given that as far as community count by region, but if you want to give us a call later we'll try to give you an estimate of that.

Okay, that sounds good. I guess my other question I had was in terms of SG&A, I guess you guys mentioned some efforts to reduce that, but I was wondering if you could elaborate on that a little bit? What specific things you think you could do this year maybe that are different or are going to continue to do? And give us a sense I guess of how much you think you can reduce SG&A?

Well, obviously, I'm not going to estimate a number specifically, but we talk about in the past year or two about 20% of our G&A has been related to land. So as we reduce our owned land inventory that will bring down our G&A. Also, as we've talked, unfortunately, we've continued to reduce our headcounts, we have continued that reduction in January and February. So those are the type of things we're doing to bring G&A down, along with the normal only spend dollars absolutely when we have to, in general. We've made all of our Company very aware of that. So we have been making quite a bit of progress and expect to continue that, Alex.

Okay, that sounds good. Phil, I don't know if you mentioned the cancellation rate for the quarter? I think I got the one for the year, but I don't know if you mentioned the one for the quarter?

Yes, I thought I did. For cancellations for -- let me just get to that -- our traffic, our cancellations -- our cancellation rate for the quarter was 49% compared to 37% in the third quarter, and it was 59% in '06's fourth quarter, Alex.

Okay, great. And if I could ask one last one, I know you guys have a program that helps people I guess get a lower rate. I guess you guys are buying down the rate. So where does that incentive, how does that get accounted, is that just kind of increases cost of goods sold?

Alex, in the revenue line we built a certain amount in our houses to cover financing, so part of it's there. If we do spend some other amounts, that would go through the cost of sales line, so it does -- it's all in the margin line, some in the revenue line, some in the cost of sales line.

Okay. Thanks a lot, guys.

Thank you.

Thank you.

Other questions?

Your next question comes from [Dennis McGill] of Zelman & Associates. Sir, go ahead.

Good afternoon, guys. How are you?

Hi, Dennis.

Good day, Dennis.

I just want to check on two numbers real quick that you had mentioned to make sure I wrote them down correctly. What was the gross margin on orders in the Midwest running right now?

We said 12% to 15% on [new orders.]

And just to be clear, that includes interest; right?

What that includes is interest while we're actually building the house, yes, it does.

Okay. And then the other number you had mentioned, I think you said you reversed about $165 million of the impairments this year, and just to make sure I'm comparing that to the right number, you've incurred about a total of $265 million or so through '06 and '07?

Yes, since day one, that's right.

Okay, so that -- the difference between the two is basically the balance of what you have on the books right now?

That's right, round figures.

Okay. And on the land sales that you guys are looking for for '08, you mentioned you had $6 million or so under contract, is that the only thing that's been agreed to sale so far this year?

The $6 million represents what was under contract at 12/31/07. We're obviously working on other transactions, but that's all that was under contract as of 12/31/07.

And anything else that's gone final so far in the first month?

Nothing we can talk about there, Dennis.

Okay. I mean I guess just -- I realize it's kind of a moving target, but the last couple years being around $50 million or $60 million before West Palm in land sales, is that a fair assumption for '08?

I'm not giving any projections on things like that, Dennis, but we are continuing to focus on land sales, especially in Florida.

Okay. The other thing I wanted to kind of drill down on, you had mentioned on the senior notes, I believe, you said you had restricted payment cushion of $95 million. Could you just talk about what that relates to?

You have a restrictive payments basket, and that basket is used as far as allowing you to do things, such as pay dividends, buy back stock, those type things.

Okay, so assuming you didn't want to buy back any stock or pay any dividends in addition to the preferred, there is nothing that would trip that covenant?

Right now, there's $95 million in that basket, so theoretically we could spend $95 million. We go through the calculation every quarter, you know, the basket goes up by income, it goes down by losses, and those type things.

And those losses include impairments?

Yes, it does.

Okay. And is there anything else on the senior notes that you would have to worry about operationally, as far as a covenant violation would go?

No.

Okay. And then on the revolver, the tangible net worth covenant, where you have a $40 million cushion, I assume that you would be proactive in talking with your banks in March ahead of any violation there?

Absolutely. We meet with our banks twice a year. We think we have a very, very good bank group. We've been led by JP Morgan and Wachovia for a number of years. We do not anticipate any significant issues with them, but again we do meet with them twice a year, the upcoming meeting is in March, and we'll talk through how things look, get their input and so forth.

So you would expect to have some resolution prior to announcing first quarter results, one way or another?

Would not say that, I'm not going to predict when and if we're going to have any issues. What we just said is the most restrictive covenant we have is minimum net worth. There's $40 million in there, and, again, that depends on how the first and second quarters go of next year and so forth, but we'll work through that on a prospective basis, like we try to any issues.

Okay. And then, and I appreciate all the color guys. Just one other number I wanted to verify, on the development spend in '08, did you say $35 million?

Yes, that's the approximate number we have for '08, and last year we spent about $100 million, Dennis.

Okay. And for acquisitions though then combined you're going to be somewhere around 65 ish versus almost 125 in '07?

That is the current estimate, yes.

Okay. Perfect. Thanks again for all the color, guys.

Thank you.

Thanks.

Your next question comes from Lee Brading of Wachovia.

Hi, guys.

Hey, Lee.

Wanted to, on the free cash flow, if you could give any quarterly kind of guidance. It sounds like I guess with the tax refund here coming in Q1, and I would imagine that's typically a draw-down period for you guys, you looking to be positive free cash flow here in Q1 and then sequentially going forward, as well?

We don't really give quarterly type estimates. Obviously, the first quarter with our backlog going in, probably won't be doing a whole lot of cash flow the first quarter, due primarily just to those low level of closings. But like you say, we do expect to get that cash tax refund in, and then we are working on land sales, who knows when some of them will happen. The only projection we really gave is that we do plan to have the homebuilding line down to zero by the end of the year.

Okay.

A lot of it depends on housing sales, how our sale are, you know, as well as land sales.

Okay. And on the tax line item, with this refund, and also you mentioned was it 68, I think, or so on the deferred tax asset?

That's right.

Now, I was wondering on the timing of that if you have any kind of guidance on that, because you mentioned also in '06 you paid $45 million. Is the assumption that we should be able to go back and, I guess, by the '09 get the refund for taxes paid in '08 or something in regard to that for tax asset?

Well, the reason I gave you the $45 million that we paid in '06 under current law, I'm not sure what's happening exactly this minute with the new legislation, but we paid $45 million in cash taxes in '06, so right now there's a two-year carry back, so whatever we do in '08 from a tax loss standpoint, we can go back to the '06 number and get the 45, just like in '07 we're going back to '05 and getting the 50, that's the reason I gave you the $45 million we paid in '06.

As far as the deferred tax asset turning, you know, you also have a 20-year carry forward to recover those deferred taxes. We've not really given any projections, Lee, as far as when we're going to be able to recover the whole 68, but obviously we expect to recover it all.

Okay, great. And then on the -- I missed the breakout of the regions by -- on the community count. I guess you mentioned the Midwest, Florida, Mid-Atlantic for the 146. I apologize, I missed that.

On the community count?

Right, right. The '07, I got the '08 forecast but I didn't hear the '07, where you are?

The '07 is 76 in the Midwest, 34 in Florida, and 36 in the Mid-Atlantic for the 146.

Okay. And then can you give -- any comment you can make on January? I know it's probably not much that you can really give from a visibility from January, but any comments on January as we start the year here?

As far as January, we sold about 160 homes, which was better than the three months individually of the fourth quarter '07, so we did have about 160 net sales in January of '08, but that was about 40% below January of last year. You may recall, that the first quarter of last year we actually had pretty good sales.

Right, right. Great. And then on the Florida margin I guess you mentioned, was that -- did you mention that number? I got the other margin -- region's areas, but I missed Florida.

As far as what we're --?

The gross margins, yes?

15%.

Yes, did you hear that?

15%, is that right?

12% to 15%.

12% to 15%. Okay, great. Thanks very much.

Uh-huh.

Thank you.

Your next question comes from [Eric Landtree] of [Morning Star].

Hi, thanks for taking my questions. Did you say there were 4,800 finished lots?

That's right.

Okay. And the total owned lots was around 14,000; is that correct?

Yes, uh-huh.

So that's 30 some percent. Didn't you say last quarter about 70% of your own lots were finished?

No, no, what I said was about 30% was finished lots.

Okay, the [inverse]. My next question is about [Dominion], have you or do you plan on any different type of behavior? I know you don't see them head to head a lot, but basically Columbus is down to you folks and them and a bunch of smaller guys. Do you anticipate any different type of behavior now that they're going to be private?

No, you know, our approach towards this market has not changed for over 20 years, and we feel very good about our market position. We wish this market were larger. It's a contracting market, but in the face of that contraction, our market share today stands at over 30%, it's the highest at any time in Company history, and we have a very strong reputation in this market, and we feel about as good as we could feel about what we do and how we do it here.

No, no, I agree. I'm, I guess, relatively positive about Columbus because I guess, I think it was in 2003 it topped out at over 12,000 permits, and now it's down to about a third of that, basically the same amount of permits as in the mid '80s. If you had to guess, would you bet that Columbus turns around before Florida, or visa-versa? I'm just trying to sort of gauge where your biggest market is?

I don't know. First of all, I'm not sure how you define turnaround?

Well [about], how's that? I mean how long can Columbus stagger along with 4,500 permits annually?

I don't know, it could be a long time. Columbus, you know, there's really a number of questions on that point. For one thing, the job growth prospects in Columbus are not nearly as strong on a relative basis as they are in either Tampa or Orlando.

Agreed.

Number two, even if Columbus were to remain at this 3,000 to 4,000 permit level for the foreseeable future, the question is what will happen to pricing and will there be an opportunity perhaps as the market begins to gain a little bit more confidence in itself as opposed to maybe outright demand, will there be -- and as the used home inventory begins to reduce itself, it has reduced itself somewhat, will there be a little bit more pricing opportunity for new homebuilders, like us, so that we can begin to move back towards a more respectable level of profitability.

It's very difficult for us to know or to project whether the Midwest markets will come back before Florida. They never enjoy the same level of price appreciation, so even though they've fallen on a relative basis, they haven't fallen as far, but I don't know that I could really project that with any level of confidence, and it would just be a guess anyway.

But I would argue that the pricing is much more realistic there than Florida, Arizona, California, anywhere else, and, therefore --.

I don't know about Arizona or California, but I hope that you're right. I think you might be.

Yes.

I think we're probably, you know, we might be closer to a more long-term equilibrium here than in some other places, but I'm not sure.

Last question. Phil, you mentioned that there was a component in the revenue line to make-up for that subsidized 30-year mortgage; is that correct?

What I said was when we price a home we build into the price of our home a certain amount for financing.

So that's reflected in the average sales price?

Yes, it is.

Okay. Thank you. Good luck, guys.

Okay. Thanks. Appreciate it.

(OPERATOR INSTRUCTIONS.)

You have a follow-up question from Alex Barron of Agency Trading Group.

Yes, thanks, guys. So I think in the press release you put out at the end of the year, I thought it said you were going to get like $82 million from the land sales, and I think you only booked $42 million, is that just a delay in getting that revenue, or --?

Now, when we had our land sales in the fourth quarter, Alex, we got almost all of that cash in the fourth quarter.

Right.

Some of it, a little bit went over into the first quarter, so.

But there's $43 million in the disc op line, and he's looking at the $42 million from continuing operations. That's why you're missing the $83 million.

I think it's an issue of what's in the discontinued operations line, Alex. I think is the difference, but, no, from a cash standpoint we realized almost the entire $80 million in cash in the fourth quarter.

Oh, okay, so part of it went through discontinued operations. Okay.

Yes, like we said, we look at our -- when you look at our land sales in the fourth quarter, when we sold almost 4,000 lots, about 500 of the lots were Palm Beach, so the Palm Beach is in discontinued operations, but the other are not.

Okay.

Also, when you look at the land sales in the fourth quarter, there was about two-thirds raw land, one-third finished lots, so you can't really compare was Palm Beach more finished lots or raw lots, you got to kind of look through it that way. But, again, we got almost all the cash in the fourth quarter.

Okay. Got it. Now, I think you've mentioned that you felt comfortable with your interest coverage covenant, and you said the more restrictive was the (inaudible). Can you remind me what those two are?

The minimum net worth coverage, today we have about $40 million of cushion in there, and again that goes up by income, goes down by losses and dividends you pay and those type things.

Okay.

And then interest coverage covenant, we actually tweaked that covenant last August with our bank group, when we took our line from 650 to 500 and did some other things, but we think we're going to be okay. Today our best estimate is we're going to be okay in the interest coverage covenant through '08.

But what is the covenant saying?

There is a rolling 12-months covenant and then there's also a quarterly covenant, Alex. I don't have exactly what those numbers are in front of me, but again we think we'll be okay with those through '08, and again we're meeting with our banks in March for our semiannual meeting.

Okay. I have a question on the preferred equity. Are those dividends cumulative? In other words, if you had (inaudible) them?

No.

No, they're not.

All right. That's all. Thank you.

Thanks, Alex.

Any other questions?

Your final question comes from [Thomas Seering] of [Pine River Capital].

Hi, guys. Thanks for taking my call. I'm sorry, I was a bit late to the call, but could you discuss any covenants that you may have in your bank and/or bond, any covenants in -- that may restrict your ability to pay dividends on the preferred stock?

What we said in the presentation part was our most restricted debt covenant currently is minimum net worth, and our current cushion and minimum net worth is about $40 million. As far as interest coverage, our rolling 12-month coverage for the quarter was 1.6 times, and our quarterly interest coverage was 1.7. We currently estimate that we will be in compliance with the interest coverage covenant through 2008. We are having our semiannual bank meeting in March, where we get all of our banks together, and then under our public senior notes, the most restrictive issue is the restrictive payments basket, but at the end of '07 we had $95 million of cushion there.

Okay. Thank you very much.

No problem.

Your next question come from Jim Wilson of JMB Securities.

Oh, hi, guys. Good afternoon, guys.

Hey, Jim.

Phil, I just -- I had to grab another call in the middle of the call, so I might have missed it, but I was wondering what your pre-impairment gross margins looked like, and then if you could give a little color on how they compare regionally?

You know, Jim, they were about 13% for the quarter, and I would say that the color that Bob gave on new orders today is pretty much the same color as far as the higher ones and the lower ones.

What we said, Jim, was in the Midwest on sales today we're running 12% to 15% gross margins. In Florida we're running a little closer to 12%, and in the Mid-Atlantic and Charlotte and Raleigh we're in the 16% to 18% range, and in DC close to the 12% range.

Great. So, okay. So, obviously, I guess the question follows, as you can in the future your strategic, ultimate strategic reallocation of assets will keep moving to -- towards the Mid-Atlantic and a little more stable markets?

We'll just try to make certain that every house we sell is strictly in Charlotte and Raleigh.

If possible.

No, but seriously, Phil passed on this during his remarks, we're scheduled to buy about $30 million worth of land this year, and the large bulk of it is in Charlotte and Raleigh.

Okay, that makes sense. All right, very good. Thanks.

Thank you.

Thanks, Jim.

There appears to be no further questions at this time. I'll now turn the floor back over to Management for any finishing remarks.

Thank you very much for joining us. We look forward to speaking to you with our first quarter results.

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