M/I Homes Inc (MHO) 2008 Q1 法說會逐字稿

At this time I would like to welcome everyone to the M/I Homes' first quarter 2008 Earnings conference call. It is now my pleasure to turn this over to your host, Phil Creek.

Thank you very much. Joining me on the call today from Columbus, Ohio, is Bob Schottenstein our Chief Executive Officer and President, Paul Rosen, the President of our mortgage company, and Ann Marie Hunker, our Corporate Controller. First to address regulation per 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 Securities 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 any forward-looking statements made during this call, the audio of which will be available on our website through April 2009. I will now turn the call over to Bob.

Thank you, Phil, and good afternoon everyone. Our first quarter results reflect the difficult and challenging conditions facing the home building industry today. While margins and earnings remain under pressure, we continue to make progress in those areas within our control where, in light of the tough operating conditions, making progress is extremely important.

Specifically, during the quarter, we generated $99 million of cash, resulting in a further reduction of our bank borrowings from $115 million at December 31, 2007, to $42 million at March 31, 2008. Since the beginning of 2007, we have successfully reduced our bank borrowings by 90%. As a result, our debt to cap ratio at quarter's end stood at 31%. This represents one of the lowest debt levels in the home building industry. More over, we remain on target to reduce the borrowings on our credit facility to zero by the end of the year.

Reducing our land position is another area of emphasis during these difficult times and we believe our performance in this area has been noteworthy. During the quarter, we reduced our owned lot count by 10%. This was on top of the 30% owned lot reduction which we recorded during 2007. We continue to make progress in aligning our overhead structure with current demand. We have reduced our work force by more than 45% from peak levels. More specifically, our first quarter overhead expenses were 17% below last year's first quarter.

As previously reported, we successfully amended our unsecured homebuilding credit facility during the quarter thereby providing us with increased financial flexibility. As Phil will review in a few minutes, we have minimal off balance sheet exposure. The only other debt M/I Homes has is our senior notes and these do not mature until 2012. For more than two years, we have responded to market conditions by engaging in a predominantly defensive operating mode, aimed at reducing inventory and expense levels as well as continuing to improve and strengthen our balance sheet.

Home building is a cyclical business. During times like these, it is vital to give our greatest attention to those operating initiatives over which we have the greatest control. Operating defensively while focusing on those business process improvements designed to improve our customer service, enhance our quality, reduce our cost structure, and render more efficient our delivery systems will, in our judgment, continue to serve us best, as we work through the current cycle and position M/I for the eventual improvement in selling conditions.

Before I turn things over to Phil, let me briefly review our region-by-region performance. First the Midwest region. Midwest continues to be challenging as all of our Midwest markets continue to be down in single family permits this quarter. New contracts and homes delivered for the quarter were down 50% and 35% respectively when compared to the same period for 2007. At quarter's end, we owned 6200 lots in the Midwest versus 7100 a year ago. We continue to work towards reducing our investment levels in the Midwest. Presently, our gross margins on new orders in the Midwest range from 12% to 15%. Finally, let me add that during the second quarter, we are very pleased that we will be opening up our first new home community in Chicago and we're very excited about our long term prospects in the Chicago market.

Next our Florida region. We have seen this market continue to soften. New contracts and homes delivered for the first quarter of 2008 were down approximately 10% and 40% when compared to the same periods in 2007. Cancellation rates in Florida normalized during the quarter at slightly under 20%. And both new contracts and homes delivered frankly exceeded our first quarter estimates.

We sold 150 homes in the Florida region during the quarter, better than any of the previous three quarters. At quarter's end in Florida we owned 4200 lots, significantly lower than the 8700 lots we owned in Florida at the same time a year ago. Presently, our gross margins on new orders in Florida range from 12% to 15%.

Finally, the Mid Atlantic region, new contracts were down approximately 45% for the quarter when compared to the same period in 2007, while homes delivered were down nearly 30%. Our Charlotte and Raleigh markets continue to fare slightly better than our other markets. However, we have now seen, and have seen for some time now continued downward pressure on prices and a tightening of market conditions in both Charlotte and Raleigh. D.C. market remains challenging.

At quarters end, we owned 2000 lots in the Mid Atlantic region versus 2700 lots a year ago. Our margins on new orders are slightly in excess of 14% in Charlotte and Raleigh and 11% in Washington, D.C. And with that I'll turn things over to Phil to more thoroughly review our financial results.

Thanks, Bob. As we announced in December, during the fourth quarter of last year we sold substantially all of our West Palm Beach, Florida, assets. Currently we have 12 units in backlog in this discontinued operation and we expect to exit this market by the end of the second quarter. New contracts for the first quarter decreased 40% to 554. Our cancellation rate for the first quarter was 23% down from 49% last quarter, and 25% for the first quarter of '07. Our traffic for the quarter decreased 35%.

Our sales were down 44% in January while traffic was down 28%. Our sales were down 27% in February while traffic was down 27%, and our sales were down 52% in March while traffic was down 47%. Overall, gross new contracts were down 43% for the quarter. Our active communities decreased 5% from the prior year first quarter of 156 to 148 at 3/31/08. And as Bob stated, we are planning to open our first community in Chicago in the second quarter.

We delivered 63% of our backlog this quarter compared to 48% last year. Revenue in the first quarter declined 28% when compared to last year, primarily due to a 34% decline in homes delivered and an average sales price decrease of 3% to $291,000. This decrease is partially offset by an $8.4 million increase in third-party land sales when compared to the prior year quarter.

The company's results for the 2008 first quarter included pretax charges of $21.1 million of impairments and $1.2 million of writeoffs. The impairment charges consisted of $10.2 million related to ongoing inventory, $7.2 million related to land and home building assets sold, and $3.7 million related to the company's investment in joint ventures.

This quarters write-downs impacted nearly 2000 lots in 18 communities with about 90% of the impairments being in Florida. Some of the impairments in the first quarter were previously impaired and encompassed both open communities and communities still to be opened.

Over the last seven quarters we have incurred pretax charges totaling $300 million of which $63 million related to discontinued operations and have impaired roughly 26% of our total owned lots. The impairment charges consisted of $162 million related to inventory sold or held for sale, $118 million related to ongoing inventory, and $19 million related to our investment in joint ventures. With respect to impairments taken to date, approximately $6 million reversed in the first quarter of this year.

At March 31 of our 148 current active communities, we have impaired 63 of these communities or 43%. 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 charges, as well as the one time benefit related to our mortgage operations which we'll talk about in a minute, was 15% for the quarter ended March 31, '08 and this gross margin compares to 21% for the first quarter of last year. During the quarter prior to land impairment charges, the company reported profit of $195,000 on land sales, and the corresponding '08 revenue was $12.8 million.

This compares to profit in 2007's first quarter of $942,000 with revenue of $4.4 million. We currently have $3.6 million of land held for sale on our balance sheet with $2.7 million under contract, and this compares to $23.7 of land held for sale at March 31, '07 with $21.4 million under contract. Our G&A costs in '08's first quarter decreased $3.2 million primarily due to our efforts to continue to right-size our business.

Exclusive of severance and abandonment charges totaling $2.3 million for the quarter, percent to revenue was 9.8%, compared to 8.5% last year. The dollar decrease for the quarter is primarily due to a $1.4 million related to reduction in payroll, variable compensation expense due to our employee reductions, $600,000 of lower costs related to reduction in land, items such as real estate taxes, and a $1million due to decreased personnel systems infrastructure costs.

Selling expenses for the quarter ended 3/31/08 increased 90 basis points to 8.8% and from a dollar perspective selling expenses for quarter decreased $3.4 million primarily as a result of volume decreases.

Overall our first quarter SG&A expense decreased $6.6 million and was 20.2% of revenue. Exclusive of severance and abandonment, the percentage to revenue was 18.6% in the first quarter of this year. We continue to work on reducing these expenses and we had additional work force reductions in January and February. Our head count peaked at a little over 1200. We currently employee about 675 people, down over 40%.

Interest expense increased to $411,000 for the first quarter of '08, compared to the same period last year. The increase in the first quarter was primarily due to a $3.3 million decrease in capitalized interest as we have less land under development when compared to last year. In addition our quarterly weighted average borrower rate increased to 7.8% from 7.3% a year ago. This increase was partially offset by a decrease in weighted average borrowings from $560 million last year to $307 million this year.

We also wrote off $1.1 million of deferred financing fees related to the amendment we made to our credit facility. Interest incurred was $5.5 million for the quarter versus $9.7 million in '07's first quarter. We have $28.5 million in capitalized interest on our balance sheet at 3/31/08 last year, compared to $31.2 million last year, which is about 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.

During the quarter, we exchanged our airplane for one of lesser value plus $9.5 million resulting in other income of $5.5 million. Our overall income tax rate is 25% for the first quarter compared to 38% a year ago. The rate for the quarter reflects changes in estimates related to the prior years as well as a greater percentage impact from permanent items. I will now turn the call over to Paul Rosen to address our mortgage company results.

Thank you, Phil. Mortgage and title operations pretax income increased from $2.7 million in 2007's first quarter to $3.3 million in the same period of 2008. The quarter was positively impacted by $1.4 million gain upon the implementation of the new accounting guidance which calls for the inclusion of servicing values in the fair value measurement on lot loan commitments and mortgage loans held for sale. This one time gain was partially offset by a 25% decrease in loans originated from 464 in 2007 to 347 in 2008.

Additionally, enhanced financing is being offered to M/I Homes customers to help generate sales, lowering our overall margins. Loan to value on our first mortgages for the first quarter was 85% in 2008 compared to 83% in 2007's first quarter. For the quarter 80% of our loans were conventional with 20% being FHA/VA. This compares to 87% and 13% respectively with 2007's same period. Due to the enactment of the Economic Stimulus Act earlier this year, maximum FHA loan limits increased.

They now range from $271,000 in Indiana and North Carolina to $729,000 in Virginia and Maryland. Over 80% of our communities are now eligible for FHA financing, which should increase the percentage of FHA loans we originate. Less than 1% of our first quarter closings were adjustable rate mortgages. This compares to 21% in the first quarter of 2007. 1% of our first quarter 2008 applications were adjustable rate mortgages, the same as the fourth quarter of 2007.

Of mortgages closed by M/I Financial during the first quarter, less than 1% were interest-only loans, this compares to 3% in 2007's fourth quarter. The percentage of customers that received Down payment assistance in the first quarter increased to 8% versus 4% for the same period in 2007. Overall our average total mortgage amount was $242,000 in 2008's first quarter. The average borrower credit score on mortgages originated by M/I Financial was 707 in the first quarter of 2008 compared to 728 in 2007's fourth quarter. These scores compared to 716 in 2007's first quarter and 733 in 2006 fourth 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 or mandatory basis. Based on loan volume, our main investors in the first quarter were Citi Mortgage, Wells Fargo, Chase, and Huntington. In conjunction with these sales, we also entered into agreements that guarantee certain purchases as 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 $118 million were covered under the above guarantees as of March 31, 2008. This compares to $200 million of loans a year ago. A portion of the revenue paid to M/I Financial for providing the guarantee on the above loans was deferred as of March 31, 2008, and will be recognized as income by M/I Financial when they are released from their obligations under the guarantee. In 2008 we have not repurchased any loans.

The ordinary cost of business we have provided indemnification to third-party insurers on certain loans. The total of these indemnified loans was approximately $1.9 million as of March 31, 2008. The company has accrued management's best estimate of the possible loss on the above loans. On our mortgage operation captured 81% of our business in the first quarter, compared to 2007's 73%.

A portion of the increased capture rate can be attributable to an enhanced first quarter financing promotion. We believe there will continue to be pressure on our capture rate due to increased competition as the mortgage business remains slow. We continue to put financing programs in place that we believe will help increase sales. 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 credit 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. In the first quarter of 2008, 7% of our closings fell into the subprime category. Approximately 2% of our first quarter closings were in the alternative category with the majority of these brokered. We do not have statistics on the subprime and alternative loans in the 19% that we did not capture in our mortgage program. Now I'll turn the call back over to Phil.

Thanks, Paul. Now as far as the balance sheet, our total homebuilding inventory as of March 31 decreased $329 million or 31% below a year ago. Lots owned and controlled as of March 31 decreased 33% from the year earlier period. In the first quarter, we had a reduction of 2200 lots, 620 lots related to land sales and 550 lots related to the writeoff of the joint venture. And all of these lots were in Florida. With respect to our lots under contract that we do not own, we have approximately $6 million at risk in deposits, letters of credit and pre-acquisition costs at March 31. Our total unsold land investment at March 31 is $452 million, 10,300 lots, compared to $745 million which was 15,600 lots a year ago. Compared to a year ago raw land decreased 55%. Land under development decreased 54%, and finished unsold lots decreased 22%. At March 31st, we had a $102 million of raw land, $82 million of land under development and $268 million in finished unsold lots. And the finished unsold lots the count is 4754.

The market breakdown of our $452 million of unsold land is $195 million in the Midwest, $111million in Florida, and $146 million in the Mid Atlantic region. In the first quarter, we purchased $8 million of land. Our current estimate for '08 land acquisition is approximately $30 million. And the majority of the '08 planned land purchases currently are in our Carolina markets.

As to land development expenditures, we currently estimate that we will spend about $35 million this year. As of March 31st, we had $34 million invested in joint ventures, down 33% from $51 million at March 31 '07 and approximately $22 million of our current investment represents joint ventures in our Florida region.

These joint ventures are for land acquisition and land development only and are all with home building partners. We are 50/50 partners in two joint ventures with third-party non-recourse financing and our partners are large public builders. These ventures are conservatively leveraged with total debt of $41 million and equity of $27 million, or 60% debt and 40% equity. In the first quarter of this year, the company wrote off its remaining $3.7 million investment in one of its joint ventures in Florida with outside financing and our 50/50 partner in this JV is also a large public builder.

We continue to have discussions with our JV partner and lender. We do not think we have additional significant financial exposure in this joint venture. At the end of the quarter, we had $99 million invested in specs, 217 of which were complete and 354 specs in various stages of construction, for a total of 571 specs. This translates into about 4 specs per community. And of the 571 specs, 311 are in the Midwest, 101 are in Florida, and 159 in the Mid Atlantic. At December 31 '07 we had 632 specs, with an investment of $118 million.

As we mentioned, we collected $49 million in tax refunds in the first quarter as we carried back tax losses we incurred in '07. There is approximately $35 million available for tax refunds from 2006. We currently have a $57 million deferred tax asset on our books and we believe this tax asset is recoverable. First quarter tax rate credit is about 25%. This is mainly due to changes in federal and state estimates with respect to our prior year tax positions as well as a higher percentage impact of permanent items on the rate.

In March we amended our credit facility, which matures in October 2010. With this amendment we have borrowing capacity of $250 million and our line remains unsecured, which saves us significant administrative costs. We also received a significant reduction in our minimum net worth covenant. In addition, interest coverage was changed from an event of default to a condition that adjusts permitted leverage. We feel very good about this amendment and thank our banking partners for assisting us.

The excess borrowing base capacity at quarter-end was $136 million. At March 31 '08, we also had $37 million of letters of credit outstanding. We currently estimate that our borrowings under this facility will be zero by the end of the year. Cash flow that we expect to generate this year includes cash from additional land sales, primarily in Florida as we continue our strategic focus, reduce our own lot inventory, especially finished lots, and also reduce our spec levels. Net debt to cap improved to 29% versus 39% a year ago.

And at March 31, our total debt to cap was 31%. Our current minimum net worth cushion under our amended credit facility is about $150 million, our rolling three-month interest coverage for the quarter was 1.5 times EBITDA. And as to interest coverage, our quarterly interest coverage was 1.2 times EBITDA. As I previously stated, interest coverage is no longer an event of default covenant for us. Under the restricted payments basket in our public senior notes, at quarter end we had about $80 million of cushion. We did not repurchase any shares during the first quarter.

At quarter-end, we had 3.6 million shares in treasury at an average price of $20 per share. We currently have $7 million of repurchase authority. In summary, we continue to see challenging market conditions and are very focused on reducing our inventory, expense and debt levels. This completes our presentation and we will now open the call for question and comments.

(OPERATOR INSTRUCTIONS) Your first question is coming from Joel Locker with FBN Securities.

Great job on the cash flow, guys. I wanted to talk about your backlog conversion rate in Florida. It jumped up to 116% versus a year ago's 42%. Was that just a lot of specs being closed there?

That was the biggest reason, Joel. A lot of specs are being sold and closed. You also probably noticed that our spec level did come down quite a bit compared to the end of last year, so yes, that's the primary reason.

Right. Your housing gross margin, or maybe just your gross profit on your housing revenue. Just trying to single that out from the regular gross margin or the land revenue, or the other revenue? So if you had $131 million or so in housing revenue, what was the gross profit from just the home building?

What we said in the call, was that if you ignore the impairment, our gross margins were about 15%.

15%

And that compares to 21% a year ago.

One last question. On your prior impairments. How many of those were reversed in the first quarter?

The number we said in the call was $6 million.

$6 million or so. Thanks a lot.

Thanks Joel.

Your next question is coming from Lee Brading with Wachovia Securities.

Hi, guys.

Hi, Lee.

You gave helpful information on the monthly trends and couldn't help but notice the difference going from February to March. I was wondering if you could comment there's anything in particular there? And if you could give any comment on April at this point.

Are you talking about sales?

Both, I guess sales and traffic were the same in February --

First of all I think conditions are very difficult and as a result it's not only hard but it's probably unwise to speculate. Just the erratic nature of the market now and the tremendous lack of confidence that is encumbering buyers. Two things about March, in over half our markets, we lost almost a full week of sales, particularly in the Midwest with a 100-year winter storm which shut down our operations from Thursday to nearly Monday in three of our cities.

And that did not help. Not to mention the fact that Easter was in March this year, whereas typically it's in April, and that might have resulted in a slight skewing of the numbers. In the end it all works its way through the system. Typically, March is a month where you don't have that kind of interference. We had two weekends where business was next to nothing.

The other comment I would make Lee, is that if you look at our sales on a quarterly basis, we sold 940 in the first quarter and the we sold 689 the second, and 562 the third. We did, from a comparability standpoint, actually have pretty strong sales the first quarter of last year. Demand just continues to be a problem.

Right. Is it too early to say any comment on April?

We don't have any comment on April yet.

You also mentioned in your comments about expecting additional impairments. What do you think would drive that, is it a further decline in price or lower pricing or lower absorption rate or a combination of both? We've talked to other builders, and it just seems like people are generally saying they can't bring price down much more.

Lee, I know you understand from an accounting standpoint how the impairment process works and it's very, very difficult. We would not attempt to predict what the numbers may be exactly. If you look at our average sales prices, they have been coming down. That obviously does impact impairment calculations. Your gross margins, your absorption levels, your assumption on the future, all those type things impact your impairment models. So again, we continue to see very challenging conditions and that's why we said that we may have more.

And frankly, the notion that prices can't be reduced much more, I'm not sure I understand that, any more than I would have understood five years ago the inability to raise prices. Prices can come down and they could and in some markets they are.

If you look at our prices, our average sales price in backlog peaked at $364,000 in September of '06.

Right.

And then our prices have basically come down pretty much every quarter to the $298,000 number now.

Your question is a very important one and there's been a lot of comments. Are the bulk of the impairments behind us? I think that our intuition is that we'd like to think so, but I don't know how anybody can accurately forecast that. And I know there's been a lot of different positions espoused on that, but you've got to believe that there's just way too much uncertainty and the likelihood of additional impairments, is a question of how many or how much is very difficult to answer.

Right. I appreciate that. That's helpful. And then on the free cash flow, very good job on that and directionally, the comments are very helpful too. Just kind of curious if we look quarterly, do you expect to be an incremental borrower at any time or do you expect to bring that revolver balance throughout the year?

We hope to continue to bring it down on a quarterly basis. As we said in the call, we are still working very hard on additional land sales, primarily in Florida. We did reduce our spec level, about $15 million the first quarter. We still have a number of finished lots. So again, we're working on bringing down those borrowings on a quarterly basis. And we've been able to do that the past few quarters. As Bob said, we still see us getting that down to zero by the end of the year.

Great. Last question, more of a maintenance. Can you give me the community count by region?

Yes, I can give that to you by region. Let's see. I thought I actually gave that in the call when I first started. At 3/31/08 there was 78 in Midwest, 32 in Florida and 38 in the Mid Atlantic for 148 --

All right --

And a year ago that number was 161.

Great. Thank you very much.

Thanks, Lee.

Your next question is coming from David Frank with Langer Asset Management.

I have two general questions or two topics. First is you mentioned that you're coming to Chicago. That you actually are going to open a community I believe?

In the second quarter. We announced, David, last June or July we publicly announced that we would be opening in Chicago. And since that time we've been moving very cautiously and carefully. Within the last several weeks we have moved towards inking our first deal which will result in our opening up in our first community some time during the mid-to-end of the second quarter.

But the actual location is not public yet?

I don't think it is yet.

I'll probably take a drive out there when it is public.

Make sure you buy a house while you're there.

We're actually in the market. I'll have to talk to my wife.

Actually it is public. It appeared in an article. It's in the Elgin area, David, it's a Crown Community called Highlands Woods.

Elgin.

Elgin and it's a Crown Development Community, if your familiar with them, called Highlands Woods.

Highlands Woods, okay. Actually I'm afraid for compliance purposes, we could not purchase a home. We'll certainly go out there and check it out. In terms of how you're going to allocate capital to new communities or land purchases, how are thinking about it, in just small amounts?

When we gave our land purchases this year in the $30 million area, we do not see a significant amount going to Chicago this year. However, we are looking at opportunities every day. You're always monitoring how our business is doing. In the land purchases we gave you for this year of $30 million, we have in there today what we think we'll spend in Chicago.

And most of that's actually is in the Mid Atlantic, right?

Primarily in the Carolinas.

And my second line of questioning pertains to your existing Midwest footprint. Let's say primarily Columbus. What are you seeing there? Obviously the dynamic is going to be a lot different than the dynamic in Florida, because you didn't see the huge increase in home prices. On a day-to-day basis, what are you hearing from your folks on the ground let's say in the Columbus market or the Indianapolis market?

Every market is a little bit different. But I think that if you were going to broad brush paint the Midwest, Columbus and Indianapolis, and for that matter Cincinnati, you would do so by acknowledging that there is poor to negative job growth and an excess supply of used homes on the market. And whereas as you point out, we didn't have the big runup in prices or the margin expansion, we did have some.

So, prices are dropping in all three markets. The biggest issue is really weak demand, which I think is largely as a result of poor consumer confidence. There's less in all three of those markets there are less what I would call finished lots or either in the pipeline or coming on the pipeline. So you might think that they might come back a little quicker. You just don't know, because it's going to be very much job growth driven.

Okay, thank you.

When you look at the resales on the market, it looks like the resales in Columbus, Cincinnati and Indianapolis peaked in the second and third quarter of last year. They do seem to be coming down slightly --

Phil's right, they've come down slightly since then but they're still at historically high levels.

Thank you for that insight.

Sure.

Thank you. Your next question is coming from Allen Ratner with Zelmann and Associates.

Good afternoon, guys. Thanks for all the great color. My first question for Phil, just a housekeeping one, on the tax rate which is 25%. You mentioned there was some reversals from prior benefits there. Would you expect the tax rate to stay in that level going forward or just kind of a one quarter thing?

Alan, this is Anne Marie. It'll stabilize. You always have these kind of trueups, with tax positions. We happened to file our tax return in the first quarter, where normally we do it in the third quarter.

So you would expect it to go back to the 37%, 38% range going forward?

Yes.

My second question relates to your core markets, especially the Midwest. Every week or so there's an announcement from another public builder that seems to be exiting a market you're in. I'm wondering if you have any commentary on that, if you're looking to potentially take advantage of any of the builders exiting the marketings. And if your committed to your current footprint as well.

Our goal is to be the last man standing in every market. Seriously, of course, it's good to see, you don't like to see it. You'd rather see markets so strong and vibrant that everyone wants to come there and you're selling to. Competition at some level makes everyone better. As markets are diminishing and there's less horses at the trough, that's a better thing. We have no intentions whatsoever to leave any of the markets we're currently in.

Okay, great. Have you been approached by any of the builders that are exiting as far as taking some of their land off the books?

Yes.

Okay, Thanks guys.

Your next question is coming from Eric Landry from Morningstar.

Hi guys, thanks. Phil, gross profit in land, did I hear $945,000?

That was last year. $195,000 this year --

I'm sorry, how much, Anne Marie?

$195,000

I'd just like to address the question from the fellow from Wanger here. You guys have one problem but two packages and basically that's the Midwest markets with the anemic job growth and high affordability. And when you look at Florida and D.C. it's pretty severe unaffordability. Yet over the long term the job growth has been pretty decent.

What's worse? I would assume that the Midwest problem is worse, but how much worse is that of a problem? And how do you deal with those two different dynamics?

I'm not sure, be more specific with your question, because I'm not sure if I understand it.

As we model going forward, it's difficult in the Midwest. I for one think that if we get any kind of job growth, there's a decent opportunity there. If you had to make a bet, which one would possibly bounce back at a more rapid rate or quicker. Just your thoughts on that.

That's really hard to tell. One side of me feels like it's counterintuitive to what you suggested, is that the D.C. market might start to bounce back a little sooner because of the underlying job growth there that will help eat up some of that excess supply. The long term fundamentals there, each market has had their own unique overhang. I don't know if I could really say which ones. When consumer confidence begins to come back.

And I really think that you can't underestimate that. If you wake up every day for a month and everyone around you says they feel lousy, pretty soon you don't feel too good yourself. And right now that's about what we're dealing with. There's a lot of reasons and a lot legitimate news that's making people feel that way, but the fact is that the get up-and-go associated with buying a house is incredibly hampered right now. I think that any small dose of good news creates a bright spot. Then we have the economic overhang on top of it. Home building is cyclical.

When we're in the middle of the bull run, people thought that would never end. We were getting hammered weekly, Why don't you own more land in Florida? Now it's a different question. So I don't know that I could really say or even hazard a guess. I do think that when things begin to improve, they will generally improve in most of our markets at around the same time. The pricing opportunities in the margins may be a little higher in some markets than others, but I think demand will start to come back around the same time in most of the markets that we're in.

I may be completely wrong, but that's about what I think. I think that's largely as a consequence of the national sentiment that tends to dominate our industry.

So did you indicate that you think margin may snap back quicker in the higher growth markets even though affordability is still more problematic than the Rust Belt?

I don't know, I don't know. I think margins will be slow to come back. But margins may prove to be a little bit better maybe in those higher growth markets ultimately because of the job growth. That's a very hard question to answer.

Right now we're not making a bet one way or the other, other than the fact that every day that goes by there's pent-up demand from people sitting on the sidelines, and that this cycle will end at some point.

Thank you.

Okay. I'm sorry not to be more specific.

Okay.

(OPERATOR INSTRUCTIONS) You next question is coming from Natin Dihija with Lehman Brothers.

Good afternoon.

Good afternoon.

Most of my questions have been asked, but one on cancellation rate. Obviously the rate came down to 23% this quarter. Are you seeing stabilization in that as we look into April?

We don't have comments on April.

Within the quarter did you see it stabilizing during the first quarter?

Again, it did improve the first quarter. It seems to us that the traffic is more serious buyers than before. However, our net sales have been down more than traffic. So it's kind of hard to figure out exactly what's happening. Our Can rate was lower in the first quarter.

Great. And on the tax refund. Obviously you got $49 million in the first quarter, and you mentioned there is some more that you can claim back. Do you expect further refunds this year? Or is that just available for the future?

Available for the future.

Great. Thank you much.

Thank you.

You have a follow-up question coming from David Frank with Wanger Asset Management.

Hello again. This time I wanted to ask about input costs, material costs. Have you seen any reduction in labor rates or materials costs that might help your build homes cheaper? And then also is there anyway to de-content homes or increase density in existing parcels so that you can basically deliver a unit to somebody cheaper than you would before and therefore make it more affordable?

On the first two parts of that question, our costs are coming down. They frankly can and will come down and are likely to come down further. I think we've done a good job in managing the cost side. But I think there's still work to be done there. The other part of your question about de-specing or reducing some of the features that are incorporated into a home, so as to bring the cost down is something that we have been working at and implementing for nearly two years in many of our markets.

That's something we've been doing. In terms of taking a piece that's already zoned and re-Platting and reconfiguring the density, in a couple of very, very limited isolated incidences we've been able to do that. But most of our communities do not lend themselves to that.

Okay. Thanks.

You have a follow-up question coming from Eric Landry from Morningstar.

Hi, thanks. Real quick --

Eric, you ask the tough questions.

This is an easy one.

I'll let Phil answer it then.

With regards to Chicago, we don't see many people going the direction that you guys are going in any market. Was this a land deal that you couldn't pass up? Or something along those lines?

Actually not. When we announced that we were opening, we had no idea where our first community would be. Very candidly, we had been looking at the Chicago market for a long time, probably several years, recognized that it was one of the more dynamic and robust markets in the Midwest. We liked its proximity to our other core markets. We believed, and still do believe that we could compete with the builders who had a presence there since we were already competing with most of them in our other markets.

We felt that we had product developed and product under development that would work very well there. And most importantly, we were able to somewhat opportunistically hire an individual to serve as our Chicago area President who we felt to pass that opportunity up we might look back and say that we shouldn't have done that, knowing that at some point we were going to be there anyway. We announced we were opening in Chicago last year. We've yet to open up our first community. And now we're continuing to move cautiously and slowly, but we're about to open up in our first job.

Is it safe to say that this deal pencils at higher than current Midwest margins?

Yes.

Thank you.

You're welcome.

I'd like to turn the floor back over to Mr. Phil Creek for any closing comments.

Thank you for joining us, and we look forward to talking to you next quarter.

And this concludes today's M/I Homes first quarter 2008 earnings conference call.