M/I Homes Inc (MHO) 2008 Q2 法說會逐字稿

Good afternoon. My name is Dee and I will be your conference operator today. At this time, I would like to welcome everyone to the M/I Home's Second Quarter Earnings Conference Call. All lines have placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) Thank you. It is now my pleasure to turn the floor over to your host, Phil Creek. Sir you may begin your conference.

Thank you very much and thank you for joining us today. On our call is Bob Schottenstein, our CEO and President; Tom Mason, our Executive Vice President; and Anne Marie Hunker, our Corporate Controller.

First to address regulation for our 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 July 2009.

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

Thanks Phil and good afternoon everyone. As stated in today's release, market conditions remain difficult for the homebuilding industry. Demand is weak. Consumer confidence is at or near a record low and margins remain under considerable pressure.

In many of our markets, conditions frankly have further deteriorated since the beginning of the year. Obviously, no one knows when the current cycle will end or when things will begin to turn. We do believe, however, that conditions will remain challenging for the balance of 2008 and in all likelihood through much, if not all, of 2009. And conditions may well deteriorate even further in some markets before we hit bottom.

In the face of these extremely challenging and for the most part unprecedented conditions, we have been engaged in a predominantly defensive operating strategy for nearly 2.5 years, focused on strengthening our balance sheet, reducing our debt levels and right-sizing our operations. We continue to make meaningful and tangible progress on these various defensive-minded initiatives, all of which will ensure that M/I Homes is well positioned to take advantage of the future opportunities that will occur once housing conditions begin to improve.

During the quarter, we generated $11 million of cash from operations and further reduced our home-building bank borrowings. Note that at the beginning of 2008, we owed our banks over $115 million on our unsecured revolver. At the end of the second quarter, the balance had been reduced to $10 million and we fully expect that balance to be reduced to zero by year end.

We also were successful during the quarter in reducing our inventory levels. Our total lots owned decreased by 36% in the second quarter.

Recurring SG&A is down by nearly 20% when compared to a year ago. And our headcount, which we've been reducing for more than 2 years, for the second quarter was more than 30% below where we stood last year at this time.

At quarter's end, our stockholders' equity was $466 million and our debt-to-capital ratio is 31%, which is one of the lowest debt levels in the homebuilding industry.

Finally, I want to briefly comment on the recently enacted federal legislation in support of housing. While it is by no means a silver bullet or magic wand, it is clearly a positive and a step in the right direction, which should and hopefully will help stabilize things within our industry. As we look ahead, we are confident that we are positioned to weather the current downturn.

Before I turn things back over to Phil, let me just briefly review the situation in our three regions. First the Midwest region. The Midwest economy remains stagnant and continues to be challenging. Local housing markets are soft. Single-family permits continue to be down. We continue to price competitively and continue to offer incentives and promotions, largely aimed at increasing and promoting consumer confidence. New contracts and homes delivered for the quarter were down around 25% when compared to 2007. At the end of the quarter, we owned approximately 6,000 lots in the Midwest versus 6,800 lots one year ago. Presently, our gross margins on new orders in the Midwest range from 10% to 15%. I should also note that we had our grand opening in our first community in Chicago this past weekend and are very excited about our long-range future in Chicago.

The Florida region, market conditions continue to be challenging there as well with housing starts and home prices declining. New contracts in Florida are flat when compared to the prior year. There continues to be significant pricing pressures in both Tampa and Orlando. However, cancellation rates for us have normalized and are now under 20%. At the end of the quarter, we owned 3,500 lots in Florida versus 8,000 lots a year ago. Our gross margins on new orders in Florida range from 12% to 15%.

Finally, the Mid-Atlantic region. Raleigh is fairing better than Charlotte, but both markets are still off when compared to last year. We continue to experience downward pressure on prices and continue to experience a tightening and a deterioration in both Charlotte and Raleigh. The D.C. market as a whole continues to remain challenging. New contracts and homes delivered in the Mid-Atlantic region were down approximately one-third in the first half of 2008 when compared to last year. At quarter's end, we owned 1,800 lots in the Mid-Atlantic region versus 2,400 lots one year ago. Our margins on new orders are approximately 15% in Charlotte and Raleigh, about 12% in Washington D.C.

And with that, I'll turn things over to Phil to review our financial performance.

Thanks Bob. New contracts for the second quarter decreased 22% to 530 and our cancellation rate for the second quarter was 22%, down from 23% last quarter and down from 28% in the second quarter of 2007. Our traffic for the quarter decreased 29%. Our sales were down 22% in April, while traffic was down 24%. Sales were down 20% in May while traffic was down 30%. And our sales were down 25% in June with traffic down 34%. Overall, our gross new contracts were down 28% for the quarter.

Our active communities decreased 14% from our prior year's second quarter of 161 to 138 communities at quarter's end. The breakdown by region is 80 in the Midwest, 25 in Florida, and 33 in the Mid-Atlantic. Our current estimate for year end 2008 is to have about 135 active communities. Homes delivered in 2008's second quarter were 466, declining 37% when compared to 2007's 738. And we delivered 58% of our backlog this quarter compared to 43% in 2007. Revenue in the second quarter declined 38% when compared to 2007, primarily due to a 37% decline in homes delivered and an average sale price decrease of 8% to $272,000. This decrease is partially offset by a $6.2 million increase in third-party land sales when compared to last year's second quarter. We sold about 600 lots in the quarter, primarily in Florida.

The Company's results for the 2008 second quarter included pretax charges of $39.9 million of impairments, consisting of $17.8 million related to land that we intend to build homes on. And the $17.8 million is broken down by $9.9 million in the Midwest, $1.5 million in Florida and $6.4 million in the Mid-Atlantic.

We also impaired $10.9 million related to land that we sold to third parties. And the $10.6 million is broken down by $400,000 in the Midwest and $10.2 million in Florida. We also wrote down $11.5 million related to our investment in joint ventures, which was $200,000 in the Midwest and $11.3 million in Florida.

This quarter's write downs impacted approximately 3,500 lots in 36 communities with nearly 60% of our impairments in Florida. Some of the impaired communities in the second quarter were previously impaired. And of the $17.8 million impairment related to land that we intend to build on, $16.3 million relates to open communities and $1.5 million relates to communities to be opened. And for the 6 months ended June 30th of 2008, total charges were $62.2 million, representing $61 million for impairments and $1.2 million of write-offs of deposits and pre-acquisition costs for land and lot deals that we no longer intend to pursue.

Over the last two years, we have incurred pretax charges totaling $340 million of impairments and we currently have about 40% of our total home lots impaired. With respect to impairments taken to date, approximately $5 million reversed into housing gross margins in the second quarter of 2008.

At June 30th, 2008, of our 138 active communities, we have impaired about 45%. We continue to evaluate our assets each quarter as applied to the standards of FAS 144. And it is possible, depending on market conditions, that we will incur additional impairment charges in the future. Our gross margins, exclusive of the impact of the aforementioned inventory and investment impairment charges, were 13.3% for the quarter and 14.6% for the 6 months ended June 30th of 2008.

G&A costs in the second quarter decreased $8.8 million when compared to the prior year. And we had about $1 million of severance and abandonment charges for the quarter. Year to date, G&A costs decreased $12 million compared to the prior year.

Selling expenses for the quarter and six months ended June 30th increased 190 basis points to 9.3% and 9%. And from a dollar perspective, selling expenses for the 6 months decreased $9.1 million primarily as a result of volume decreases, reduction in advertising and media costs, and payroll-related decreases.

Overall, our second quarter SG&A expenses decreased $14.5 million. However, as a percent of revenue, they increased to 21.4 in the second quarter and increased to 20.7 year to date. We continue to work on reducing our expenses and we have had additional workforce reductions this quarter. We currently employ about 630 people, which is down about 35% from a year ago.

Interest expense decreased $650,000 for the second quarter and $240,000 for the first 6 months of 2008 compared to last year. The decrease in the second quarter was primarily due to a decline of $4.1 million in interest incurred to $4.4 million, which is primarily due to a reduction in our weighted average borrowings from $483 million last year to $251 million this year.

Our quarterly weighted average borrowing rate was 7.7% compared to 7.5% a year ago. We had $28.1 million in capitalized interest on our balance sheet at June 30th, 2008 compared to $32.9 million at June 30, 2007, 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 second quarter, as required by FAS 109, Accounting for Income Taxes, we recorded a non-cash, after-tax charge of $58 million for a valuation allowance related to our deferred tax assets. We evaluate our deferred tax assets quarterly. We assess whether a valuation allowance should be established based on the consideration of all available evidence using a more likely than not standard as further described in the tax footnote in our 10-K. Given the continued downturn in the homebuilding industry during the first half of this year, the Company now anticipates being in a 4-year cumulative pretax loss position for the years 2005 to 2008. The $7.6 million of deferred tax assets remaining our balance sheet is expected to be realized through net operating loss carry backs to tax year 2006 or through subsequent reversals of the existing taxable, temporary differences.

Because of our valuation allowance situation, we do not expect to record any additional tax benefits for the remainder of the year. We currently expect to receive a $36 million tax refund in the first quarter of 2009, as a result of carrying back 2008 taxable losses to the 2006 tax year.

Year to date, we have paid cash dividends totaling $5.6 million on our common and preferred stock. The indenture governing our senior notes contain a restrictive payment basket covenant that limits the ability of the Company to pay dividends on common and preferred shares, among other things, when such basket falls below zero. At June 30th, 2008, this basket was a negative $13 million. As a result, we are currently restricted from paying any dividends. In addition, this covenant also prohibits the repurchase of shares. These restrictions do not affect our compliance with any of the covenants contained in the credit facility.

M/I Financial, which includes our title operations, our mortgage and title operations pretax income decreased from $2.2 million in 2007's second quarter to $1 million in the same period this year. The change was partly the result of a 26% decrease in loans originated from 515 in 2007 to 382 in 2008 and an 8% decrease in the average loan amount.

Additionally, enhanced financing is being offered to M/I Home customers to help generate sales which lowers our overall margins. Loan to value on our first mortgages for the second quarter was 85% compared to 84% in 2007's second quarter. For the quarter, 66% of our loans were conventional, with 34% being FHA VA. And this compares to 89% and 11% for last year's period. About 85% of our communities are now eligible for FHA financing.

The percentage of closings in the second quarter, where customers received down payment assistance, was 18% versus 7% last year. Overall our average total mortgage amount was $230,000 in 2008 second quarter. The average borrower credit score on mortgages originated by M/I Financial was 716 in the second quarter of 2008 compared to 707 in 2008's first quarter. We sell our mortgages along with their servicing rights to a number of secondary market investors. Our main investors in the second quarter were CitiMortgage, Wells Fargo, Chase, and Countrywide. And we have not repurchased any mortgages this year. Our mortgage operation captured about 85% of our business in the second quarter compared to last year's 74%.

As far as the balance sheet, total homebuilding inventories at 6/30/08 decreased $330 million or 32% below prior year levels. Total building sites owned and controlled as of June 30, 2008, decreased 32% from a year earlier. We now own 11,300 lots and have an additional 1,700 lots controlled. For the six months ended June 30, 2008, we reduced our total building sites owned and controlled by approximately 3,200 lots. With respect to our lots under contract, we have approximately $7 million at risk in deposits, letters of credit, and pre-acquisition costs at June 30th. Our total unsold land investment at June 30, 2008, is $396 million, which is 9,250 lots compared to $663 million, which is 15,400 lots a year ago. Compared to a year ago, raw land decreased 54%. Land under development decreased 41%. And finished, unsold lots decreased 32%.

At June 30, 2008, we had $84 million of raw land, $83 million of land under development, and $229 million of finished unsold lots. And the finished, unsold lots represent 4,185 lots.

The market breakdown of our $396 million of unsold land is $177 million in the Midwest, $81 million in Florida, and $138 million in the Mid-Atlantic region.

In the second quarter, we purchased $3 million of land. Our current estimate for 2008 land acquisition is approximately $25 million. As to land development expenditures, we currently estimate that we will spend about $35 million in 2008.

At June 30, 2008, we had $26 million invested in joint ventures, down 48% from $50 million a year ago. Approximately $13 million of our current investment represents joint ventures in our Florida region. Our joint ventures are for land acquisition and development purposes only and are all with homebuilding partners. We are 50/50 partners in 2 joint ventures with third-party non-recourse financing and our partners are large public builders. These two ventures have debt of $41 million and equity of $22 million.

At the end of the quarter, we had $93 million invested in specs, 174 which were completed units and 406 specs in various stages of construction for a total of 580 specs. This translates into about 4 specs per community. Of these 580 specs, 293 of these units are in the Midwest, 138 are in Florida, and 149 are in the Mid-Atlantic. At March 31, 2008, we had 571 specs with an investment of $99 million.

Our unsecured $250 million homebuilding credit facility, which matures in October 2010, has excess borrowing base capacity at June 30, 2008, of $173 million. And at June 30, 2008, we had $33 million of letters of credit outstanding. Our current minimum net worth cushion, under our credit facility, is about $120 million.

As Bob mentioned, we generated cash flow from operations of approximately $11 million for the quarter. It was our seventh straight quarter of positive operating cash flow. We remain on target that our borrowings under this facility will be zero by the end of this year.

Net debt to cap improved to 31% versus 40% a year ago. And in May, M/I Financial entered into a secured credit agreement. This credit agreement provides our mortgage company with $30 million of borrowing capacity. The credit agreement, which expires in May of 2009, is secured by certain mortgage loans. We did not repurchase any treasury shares during the quarter. And we continually focus on our liquidity and capital needs.

In summary, we continue to see challenging market conditions and are very focused on reducing our inventory expense and debt levels and being positioned when the markets improve.

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

(OPERATOR INSTRUCTIONS) Your first question comes from Ivy Zelman of Zelman & Associates.

Yes, good afternoon. I really appreciate all the detail Phil. It's excellent. When you were talking about your unsold land at $396 million and then looking at the breakdown, you said $229 million was finished, unsold lots. I think 4,185 if I got it right. What are you expecting? I think you gave it as well but I didn't catch it. Just quickly land spend to be maybe in for this year and then 2009, given you have all that finished inventory?

Yes Ivy you're right. At the end of June, we had 4,185 finished lots. The land spend in the quarter was only $3 million. And our current estimate for 2008 is about $25 million.

And I'm assuming roughly the same or low on 2009? Or at this point it's too hard to say?

Ivy, how you doing?

Good Bob. How you doing?

I'm doing good. Too hard to say but not-- very selective, very limited and only deals that make sense.

Got it. Bob you guys have been always very frank and straightforward about the challenging market environment. And clearly the recent feels like another leg down in terms of the trends with respect to absorptions. Can you kind of tell us strategically how you move forward from here in an environment where it's getting even tougher to sell homes because of whether it be tighter mortgage credit or in fact unemployment rising? Are you going to be more aggressive on pricing if necessary or do you sit back and mothball? What's M/I's and Schottenstein's strategy?

Well, I mean that's a great question. I wish there was a magic answer. First of all it's a subdivision business. Every subdivision is different even within the same market. If it makes sense to mothball a project, we would. We do not have any at this point that we have. Where we have excess inventories we may be more aggressive with trying to move through our land position. I think things are going to be very tough this year. I think things may even be tougher next year. I'd like to believe and nobody knows but based on some of the things that you've produced and what others have said, that 2010 may be the year when things begin to turn. And we just want to make certain that when they do, cause I think prices still have a little bit of room to fall in most markets, that we're not sitting here with a lot of projects that are overpriced, even though they may be well located. If they're way overpriced, we want to make sure we've worked through most of them now.

We feel very good about most of our land position. It's just that we don't feel good about it right now. So we've got to figure out what the (expletive) we're going to do to have the right subdivisions when the market turns. And it's going to. And I mean I guess that to be perfectly blunt, the goal is just to get through this, because this time will pass. And while we're playing defense 90% of the time, we're not playing defense all the time. And I think there's a lot of things in our company that are being strengthened now. It's tough to promote improvement when you're reporting $100 million loss or nearly $100 million loss. But the fact is, our company is improving. We're-- I think we're getting smarter. I think we're getting better. And I think that when things do turn, we'll be in very good shape to compete. But right now, we're just-- we're looking at every subdivision on an individual basis and trying to figure out what the right strategy is.

That was very helpful. And one of the things that you guys had explained to me, I think Phil you had explained on a cash flow basis, when we look at even where you're losing money on a per-unit basis, obviously you're recovering the investment, the sunk cost of the money spent on land to develop those lots. So looking at some parts of the country, we're told that even it's difficult to recover that cash cost or the sunk cost of land. Are you in a situation where you could be losing 10% of house and still be generating enough cash to justify building it? We were talking with one of the CEOs in the industry that indicated that even if they're losing significantly, they'll keep building cause at least they're getting the cash recovery. Is there like a breakeven point in some markets where you can't even get the cash back on land and therefore you won't keep building it? And obviously in some markets, the lights don't stay on for that reason because it doesn't make sense to do it for fun?

Ivy?

Did I stump you, sorry?

No I lost you for a minute.

Okay.

Okay, Ivy that's a great question. And the answer again is it kind of depends on every subdivision. At one time, we had almost 6,000 finished lots. We've worked that down. As Bob said, we're in the subdivision business so we look at every subdivision. In some subdivisions, we could be selling things at a little bit of a loss and still be generating some cash. But again it depends. We have been able the last couple of quarters to bring our spec investment down some. At one time, that was a little over $100 million. Now it's down to $93 million. And only spending $3 million on land in the quarter and then also not spending much on land development, it's all those things. But we look at every subdivision about what makes the most sense. And again, we're always trying to generate cash every quarter. We want to make sure we continue to improve our liquidity as best we can. That's very, very important to us.

Right. Well I appreciate it guys. Thanks a lot. Good luck. (multiple speakers)

Your next question comes from Alex Barron of Agency Trading Group.

Hey guys. How you doing?

Hey Alex.

Wanted to ask you, this is more of a general impairment methodology question. I guess roughly at what point in the gross margins does an impairment get triggered? And then after you impair it, what is the gross margins sort of get reset back up to in a given community?

Alex, we look at every subdivision. In general, when you get to that 10% gross profit level, you tend to, starting to look at it very, very carefully. As far as what it gets reset to, again it depends to some degree on what your selling expense is and other things are. It's not like once you impair it, you create some 15 to 20% margin. I don't want to mislead you there. But again, the simple answer is when it's get down to that 10% range, you start getting better, very close to an impairment.

Okay. And I think I heard you say there was like 44%, 45% of your communities have been impaired so far.

Of the active communities at the end of the second quarter, yes, about 45%.

Right. So do you have like a breakdown by region of what that percentage is by region?

Alex that's not anything we have disclosed. Obviously we have that. If you look at the majority of our impairments, by region, the biggest part of our impairments have been Florida. We've impaired a lot of communities in Florida. We've also impaired a lot of communities in the Mid-Atlantic, more in D.C. than it has been the Carolinas. And then the smallest amount of impairments, since we've started by region, has been the Midwest. But we did impair I think about $10 million of the impairment from the second quarter were in the Midwest. So again we've impaired in almost half of our communities companywide.

What's the difference about the Midwest that maybe doesn't trigger as many impairments? Is it just the fact that you never and overpaid for the land to begin with?

I think there's a couple things Alex. One thing is that our biggest part of the Midwest is Columbus. And in the Midwest in general, they did not have the huge price run up that a lot of other markets have. Also there is not the large builder competition in the Midwest. Therefore, you don't have as much competition doing large impairments either and dropping prices. So I think it's a couple of those different things Alex.

Got it. Thank you so much. Again your disclosure was very helpful.

Thank you Alex. Next question.

Your next question comes from David Frank of Wanger Asset Management.

Hello gentlemen.

Hey David.

First off on covenants, do I understand correctly that the primary covenant to look at is the net worth covenant? Where you say you have $120 million of cushion?

David when you look at the credit facility, that is the covenant we disclosed with the $120 million of net worth. When you get over to the dividend issue that is from the $200 million of public senior notes.

Okay. But if-- basically if you, I'm trying to understand. If you don't go through that $120 million net worth cushion, then your borrowing base of approximately $130, $140 million should remain available to you?

The bank line, the $250 million unsecured bank line matures in October of 2010. And as long as minimum net worth is not tripped and as long as depending on the assets you have in place at the time, the borrowing base is a calculation of that. Yes that line would be available to us.

Is there a certain advance rates on different kinds of assets that play a role in the borrowing base?

Yes there is.

Do you disclose that?

No we do not, but bank credit agreements are filed as part of the pubic documents. I mean round figures the backlog's at 90% or 95%. That's the highest.

Right.

Then you go down to the lowest which is raw land, which is the lowest advance rate. But if you want that detail, we can give that to you offline.

Okay. And then in terms of cash flows, I think I heard you say you expect $36 million rebate from the government in Q1 2009?

We expect to get about a $36 million tax refund by the first part of next year. That's right.

Okay. And that's just based on what is it, the 2006, recovering 2006 taxes paid?

That's right.

Okay. And then one last question, on the financing area, I-- you noted that about 18% of your closings in Q2 utilized down payment assistance. I understand that FHA is-- has ceased allowing the down payment assistance program to operate. Is that-- does that mean that 18% goes away?

Well, down payment assistance is going to go away. I don't know exactly when that will take affect. It's some time in the next couple of months.

October 1.

October 1. Thank you Tom. Will that have an impact in the short term? I think it will. I don't think it'll be significant. At the risk of sounding I don't know maybe idealistic, I think it's a good thing that it's going away. In other words, if this recent housing stimulus act had brought back subprime financing, I think people would be up in arms. And I think that down payment assistance has largely been something to help or maybe accelerated us getting into this. People can't save a few bucks, I'm not sure they ought to be buying a house. Now there are some ways to mitigate against it, but basically I think it's probably a small, short-term negative. We're not terribly concerned about it. It's never been a-- the issue is not how many people have used it. It is how many people have used it by necessity.

Right.

Some people elect to use it even though they don't have to. So I guess the short answer to your question is probably a negative but not a very significant one. And I think in the long run, it's healthy for the economy.

That's helpful. Thank you for that.

Okay.

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

Yes thank you. I'm not sure I've-- I'm sure you probably mentioned it Phil. The cash flow from operations for the quarter? I guess I missed that.

It's about $10 million.

Positive?

Positive.

Okay. And I thought I also heard you say something about you were restricted from paying dividends. Is that on the common stock or is that on the preferred?

It's on both. And again Alex that is a restricted basket covenant on our $200 million of public senior notes. That basket is now negative by about $13 million. And that prevents a cash dividend payment being made.

So starting next quarter I guess they'll-- they will stop, is that what you're saying?

That's right.

Okay. All right, just wanted to confirm. Thank you.

Thanks.

Your next question comes from Eric Landry of Morningstar.

Hi, thanks. Phil, did you mention land gross profit? If you did, I missed it.

No, we did not discuss that. What we did discuss was in the quarter that we sold about 600 lots primarily in Florida and we also disclosed what the impairment was on those lots. But nothing from a gross profit standpoint.

Okay, is there a reason? Cause you used to break it out.

I mean that was a long time ago, before all these impairments muddied up the information.

Okay. All right, thanks. That's all I have.

Thanks Eric.

No problem.

Your next question comes from Lee Brading of Wachovia.

Hey, it's Lee Brading. Close enough.

Hey Lee, how you doing?

All right guys. I missed I think from all the information I did miss on the sales. You gave some monthly information. I basically got May, June, but I missed the April trend from a traffic and sales standpoint?

No problem. For the quarter, our traffic for the quarter decreased 29%. Our sales were down 22% in April while traffic was down 24%. And then sales were down 20% in May with traffic down 30%. And our sales were down 25% in June Lee, with traffic down 34%.

Okay great. So it seemed pretty consistent from a-- I mean you see a little acceleration I guess on the traffic side in June but fairly consistent on the sales side throughout the quarter is what it looks like. Okay. On the land side, you did a good job obviously of only spending what, $3 million from a purchasing and land and looking at $25 million this year. Just kind of curious, I mean where is that $25 million? Is that aspect that you're having to take down some lots do you think or is it a matter that you see areas you're running out of land that you need to purchase on?

Lee if you look at the $25 million we're currently projecting, there's probably about $10 million of it or so-- again these are estimates at this time. In Chicago, whereas Bob said we've opened our first community and we're being very, very careful there, but looking at a couple of opportunities there. The next biggest purchase will probably be in the Carolinas. So those will be the-- between Chicago, Raleigh and Charlotte, that will be the biggest part of the $25.

Okay. That's helpful. At what point do you start running out of land in certain pockets I guess and say in Florida or Midwest and other areas. I guess to some-- similar not that you're running out of land in Chicago, but you need to purchase land as you enter that market. Are there areas that you're going to need to say in early 2009?

If you look at the 11,300 we own at June 30th, Bob talked about the 6,000 in the Midwest. So other than Chicago, we have a pretty good land supply in the Midwest. Florida, we've taken it down a lot but we still have about 3,500 lots. And then in the Mid-Atlantic, we're down to 1,800 lots. So again we are buying a few things in the Carolinas. And as D.C. gets on the upswing, there will be some purchases there. So that's kind of the breakdown Lee.

Okay and then last item here is just on the specs. I think you said you had about four per community? And is that-- I guess what would be a comfortable level for you guys or a target that you would as-- more in an ideal setting you could-- you would target.

I think that's kind of the number, anywhere like the 3 to 5 range.

Okay.

And we look at by subdivision units. We also look at dollars we have invested. And then we also look at the specs that are complete. We obviously don't want to have too many specs complete. But we do have that investment now under $100 million. And we're continuing to work that down to generate some cash.

Great. Okay, thanks very much guys.

Thank you.

Thanks Lee.

(OPERATOR INSTRUCTIONS) There appears to be no more questions at this time. I would now like to turn the floor back over to your host for any closing comments.

Thank you very much for joining us. Look forward to talking to you next quarter.

Thanks.

Thank you. This concludes today's M/I Home conference call. You may now disconnect.