M/I Homes Inc (MHO) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the M/I Home's Third Quarter Conference Call. All lines have placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS) Thank you. I would now like to turn the conference over to Phil Creek. You may begin your conference.

Thank you very much. Joining me on the call today is Bob Schottenstein, our CEO and President; Paul Rosen, the President of our mortgage company; 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 we are prohibited from discussing significant non-public items with you directly.

And as to forward-looking statements, before we begin, I would like to remind everyone that the cautionary language about forward-looking statements contained in today's press release also applies to any comments made during this call. Also 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 October 2009.

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

Thank you Phil and good afternoon. We are undoubtedly facing what may well be the most difficult time in the history of the homebuilding industry. After experiencing difficult conditions throughout most of 2006, all of 2007 and the first half of 2008, market conditions for housing and the overall economy for that matter deteriorated even further in the third quarter. Demand remains weak. Inventory levels are too high in most markets. Consumer confidence is at or near an historical low. Unemployment is on the rise. And if all that weren't enough, mortgage lending standards have tightened and the recent unprecedented turmoil in the financial markets have further contributed to very tough conditions for homebuilders.

No one knows how long these conditions will last or whether we have hit the bottom. What we do know is this. In this increasingly uncertain and challenging environment, it is absolutely essential that we focus on what we can control and that we continue to execute on the predominantly defensive operating strategy that we first began to deploy over two years ago. That strategy which is squarely aimed at strengthening our balance sheet, reducing our debt and inventory levels, generating cash, and optimizing the overhead structure of our operations has served us well as we have made considerable progress on a number of important fronts.

One, debt reduction. At the beginning of 2007, we owed $410 million on our homebuilding credit facility. At the beginning of this year, we have successfully reduced that amount to $115 million. At the end of the third quarter, the balance was zero and we now have $14 million cash on hand. At the beginning of 2007, our net debt-to-capital ratio stood at 44%. It is now 32%.

Two, land. Our owned lot count equally 9,530 lots at the end of the third quarter, 43% less than a year ago and a 31% reduction since the beginning of 2008. Our fourth quarter land sales last year of nearly 4,000 lots was a major part of this reduction. And it's worth noting that relative to our size that bulk sale was arguably the largest in our industry. And as we now look back at it, it was clearly a very prudent and timely move.

Three, cash flow. We have successfully generated positive cash flow for eight consecutive quarters and we look forward to receiving a nearly $40 million tax refund, which is a significant amount for us early next year.

Four, we continue to reduce both our community count and our investment levels in specs. Phil will detail this in a few minutes.

Five, we will continue to work diligently at reducing our SG&A. For the quarter, it is nearly 30% less than it was a year ago. And our head count is now down by more than 50% from peak levels.

Finally, our shareholders' equity at quarter's end equaled $408 million. With no bank debt and no other significant debt maturing until 2012, we are strongly positioned to work through this downturn and are well positioned to capitalize on opportunities that will occur once housing conditions improve.

Before discussing our regions, let me just say a brief word about recent Congressional action. The stimulus package passed by Congress several months ago contained some important oversight provisions for the government-sponsored entities. On the other hand, the so-called $7,500 credit for first-time homebuyers failed to spark any meaningful home buying activity. And in a word was ineffective. We urgently need a stimulus package aimed at housing that provides a real and meaningful credit for all homebuyers, not just first-time buyers and not just for buyers of new homes. Such a credit, if coupled with a temporary rate buy down, would in our view go a long way in helping to stem the tide of falling home prices and would help restore real demand. A program like this, as many of you know, was employed in 1975. It worked then and it will work again now and would really go a long way in helping to bolster our entire economy.

Let me review our regions. First the Midwest. The Midwest economy remains stagnant and single-family permits continue to be down this quarter. We continue to price competitively and continue to offer incentives and promotions. New contracts and homes delivered were down this quarter approximately 5% and 30% respectively when compared to 2007. I should note that Columbus reported its first positive increase in 15 quarters, frankly passing our expectations and certainly due in part to our sales incentives.

At September 30, 2008, we owned approximately 5,400 lots in the Midwest versus 6,500 a year ago. At the end of the quarter, our backlog average sale price had decreased approximately 5% while backlog in units and dollars decreased 35% and 40% respectively from the prior year.

Finally, let me note that we had our grand opening in Chicago this quarter, recorded our first sales and remain very excited about our long-term success in the Chicago market.

Next our Florida region. Market conditions continue to be challenging. Economic conditions have deteriorated further in this region. Home prices continue to decline as the market works off excess housing inventory. New contracts in our Florida operations were down over 30% when compared to the prior year. Homes delivered for the quarter were down approximately 40% compared to the same period in 2007. There continues to be significant pricing pressures in Florida. However, our cancellation rate seemed to have normalized for the quarter being just under 20%.

At the end of the quarter, we owned over 2,300 lots in Florida versus 7,300 a year ago. Additionally, we have reduced the number of active communities we have in Florida.

The Mid-Atlantic region. Raleigh new contracts more than doubled this quarter compared to the prior year period. This was a good thing and continues to fair better than Charlotte. With that said however, in both of these markets we continue to experience downward pressure on prices and there's no question that there's a tightening taking place. The D.C. market as a whole remains quite challenging.

New contracts and homes delivered for the Mid-Atlantic region were down approximately 20% and 10% respectively for the quarter when compared to the same period of last year. At quarter's end, we owned just over 1,700 lots in the Mid-Atlantic region versus nearly 2,500 lots a year ago. Sales in our two North Carolina markets were down approximately 25% year to date. And backlog units are down 35% at quarter's end compared to the same period of 2007.

Sales in our D.C. market were down 50% year to date and backlog units are down 75% at the quarter's end compared to the same period in 2007.

Before I turn things over to Phil to review our financial highlights, let me just conclude by saying this. Though our approach is and for some time now has been largely defensive, please know that it is not entirely so. We continue to focus on and invest in those offensive initiatives that we think are essential to the future success of our business. In that regard, M/I Homes has long enjoyed a very solid reputation as a quality builder with strong customer service, good sales people and well-designed product. Today, we are clearly better at customer service than we were a year ago. We have better trained sales people. Our quality is excellent. And our product continues to get better as we work on new home designs that will meet the needs and wants of tomorrow's buyers.

While it may not reflect in our results, because of the environment we are operating in, we believe that investing in these offensive initiatives will prove vital to our success in the years to come. While the primary mission of M/I today is to play defense and just get through this, the future is particularly bright for those homebuilders like M/I that not only remain standing throughout this downturn but that emerge from this cycle as better businesses. Phil?

Thanks Bob. New contracts for the quarter decreased 16% to 456. Our cancellation rate in the third quarter was 32%, up from 22% last quarter but down from the 37% in 2007's third quarter. Our traffic for the quarter decreased 27%. Our sales were down 10% in July while traffic was down 37%. Sales were up 12% in August while traffic was down 21%. And our sales were down 38% in September while traffic was down 22%. Overall, gross new contracts were down 23% for the quarter.

Our active communities decreased 13% from our prior year third quarter of 159 to 138 at 9/30/08. The breakdown by region is 80 in the Midwest, 26 in Florida and 32 in the Mid-Atlantic. Homes delivered in the third quarter were 555, down 27% compared to last year's 765. And we delivered 63% of our backlog this quarter compared to 47% in 2007.

Revenue in the third quarter declined 31% when compared to last year, primarily due to a 27% decline in homes delivered and an average sale price decrease of 6% to $273,000.

Third-party land sales were $6 million for the quarter with sales in our Midwest and Florida markets.

The Company's results for the 2008 third quarter include pretax charges of $43.5 million in impairments, consisting of $27.8 million related to land that we intend to build homes on and the $27.8 million breakdown is $15.9 million in the Midwest, $1.7 million in Florida, and $10.2 million in the Mid-Atlantic. We also wrote off $356,000 of deposits and pre-acquisition costs for land and lot deals we no longer intend to pursue. We also had $11.6 million related to land that we sold or intend to sell. And the breakdown of the $11.6 is $4.2 in the Midwest, $7.1 in Florida and $310,000 in the Mid-Atlantic. And last we had $3.7 million related to our investment in JVs and the breakdown of the $3.7 was $1.2 in the Midwest and $2.5 in Florida.

This quarter's write downs impacted approximately 3,200 lots in 45 communities with nearly 50% of our impairments in the Midwest. In 2008's third quarter, we reduced our owned Midwest lots by 10%. And for the 9 months ended 9/30/08, total charges were $105.7 million, representing $104.1 million for impairments and $1.6 million for the write-off of deposits and pre-acquisition costs.

And over the last 9 quarters, we have incurred pretax charges totaling $383 million of impairments and currently have 46% of our total owned lots impaired. With respect to impairments taken to date, approximately $8 million reversed into housing gross margins in the third quarter of 2008. And at September 30th, 2008, of our 138 current active communities, we have impaired 71 or 51% of our active communities. We continued to evaluate our assets each quarter as applied to the standards of FAS 144. It is possible, depending on market conditions, that we will incur additional impairment charges in the future.

Our gross margin, exclusive of the impact of the aforementioned inventory and investment impairment charges, were 11.8% for the quarter and 13.6% for the first 9 months of this year.

G&A costs in 2008's third quarter decreased $6.5 million compared to the prior year. We had about $800,000 of severance and abandonment charges for the quarter. And year to date, G&A costs decreased $18.4 million compared to the prior year.

Selling expenses for the quarter and 9 months ended 9/30/08 decreased $5 million and $14.1 million. Overall, our third quarter SG&A expense decreased $11.4 million. We continued to work on reducing these expenses and we have already had additional workforce reductions this quarter. We currently employ about 590 people, which is down about 35% from a year ago.

Interest expense decreased $2.5 million for the third quarter and $2.7 million for the first 9 months of 2008 compared to the prior year. The decrease in the third quarter was primarily due to a decline of $4.5 million in interest incurred to $4.2 million that was primarily due to a reduction in our weighted average borrowings from $479 million last year to $242 million this year.

Our quarterly weighted average borrowing rate was 7.7% compared to 8.1% a year ago. We had $27.2 million in capitalized interest on our balance sheet at 9/30/08 compared to $33 million a year ago, which represents 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 homes are under construction.

We recorded a non-cash, after-tax charge of $21.6 million for the third quarter and $79.6 million for the first 9 months of 2008, respectively for a valuation allowance related to our deferred tax assets as required by FAS 109. At 9/30/08, we do not have any net deferred tax asset remaining on our balance sheet. And we do not expect to record any additional tax benefits for the remainder of the year.

As Bob stated, we do have a $39 million tax receivable on our books. We expect to receive that cash refund in the first quarter of 2009 as a result of paring back 2008 taxable losses to the 2006 tax year.

Now Paul Rosen will cover our mortgage company results.

Thank you Phil. Mortgage and title operations pretax income decreased from $2 million in 2007's third quarter to $618,000 in the same period of 2008. The change is partially the result of a 20% decrease in loans originated from 549 in 2007 to 439 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 third quarter was 89% in 2008 compared to 85% in 2007's third quarter. For the quarter, 47% of our loans were conventional with 53% being FHA/VA. This compares to 90% and 10% respectively for 2007's same period. Approximately 80% of our communities are now eligible for FHA financing.

Percentage of closings in the third quarter where customers received down payment assistance was 32% versus 7% for the same period in 2007. Overall, our average total mortgage amount was $245,000 in 2008's third quarter.

The average borrower credit score on mortgages originated by M/I Financial were 718 in the third quarter of 2008 compared to 716 in 2008's second quarter. These scores compared to 726 in 2007's third quarter and 714 in 2007's second quarter.

We sell our mortgages along with their servicing rights to a number of secondary market investors. Our main investors in the third quarter were CitiMortgage, Wells Fargo, Chase and Countrywide. We have not repurchased any mortgages this year. Our mortgage operation captured about 84% of our business in the third quarter compared to 2007's 77%.

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

Thanks Paul. Now as far as our balance sheet, as Bob stated we continue to focus on our cash generation and our liquidity. Total homebuilding inventories at 9/30/08 decreased $401 million or 39% below a year ago. Total building sites owned and controlled as of 9/30/08 decreased 40% from a year earlier. We now own 9,530 lots, which includes our share of joint ventures. And have an additional 1,626 lots controlled. And for the 9 months ended 9/30/08, we reduced our building sites owned and controlled by about 5,000 lots.

With respect to our lots under contract, we have approximately $5 million at risk in deposits, LCs, and pre-ac costs at 9/30/08. Our wholly-owned, unsold land investment at 9/30/08 is $350 million, 8,250 lots. And that compares to $614 million or 15,030 lots a year ago. Compared to a year ago, raw land has decreased 59%, land under development decreased 24% and finished unsold lots decreased 41%. At 9/30/08, we had $69 million of raw land, $75 million of land under development, and $206 million of finished unsold lots. And the $206 million of finished unsold lots is a little over 4,000 lots. We constantly focused on getting our finished lots through our systems to generate cash flow. The market breakdown of our $350 million of unsold land is $156 million in the Midwest, $67 million in Florida, and $127 million in the Mid-Atlantic region.

In the third quarter we only purchased $3 million of land. We are seeing lots of land opportunities but are being very careful as to purchases. Our current estimate for 2008 land acquisition is approximately $30 million. And as to land development expenses, we currently estimate we will spend about $40 million developing land this year.

As of 9/30/08, we had $23 million invested in joint ventures, down 46% from last year's $43 million. Approximately $11 million of our current investment represent joint ventures in our Florida region. These joint ventures are for land acquisition and development purposes only and are all with homebuilding partners.

In the third quarter of 2008, we wrote off our remaining $2.5 million investment in one of our joint ventures in Florida with outside financing. We have one remaining joint venture with third-party financing. In that JV, we are 50/50 partners with a large public builder that has a loan with a loan to value maintenance ratio. And in that remaining JV, the venture has debt of $12 million and partners' equity of $14 million.

At the end of the quarter, we had $82 million invested in specs, 190 of which were completed and 289 specs in various stages of construction for a total of 479 specs. This translates into about 3 specs per community. And of the 479 specs, 240 are in the Midwest, 129 are in Florida and 110 are in the Mid-Atlantic. And at June 30th of 2008, we had 580 specs with an investment of $93 million.

Our unsecured $250 million homebuilding credit facility, which matures in October 2010, has excess borrowing base capacity at 9/30/08 of $142 million. At 9/30/08, we had no borrowings under this facility. We do have $35 million of letters of credit outstanding. Our most restricted bank covenant is minimum net worth. Our current minimum net worth cushion is about $70 million.

During the quarter, we generated $17 million of cash from operations. This was aided by our spec inventory reduction of $11 million and proceeds from land sales of about $6 million. It was our eighth straight quarter of positive operating cash flow.

In the third quarter of 2008, we did not pay any cash dividends nor did we repurchase any stock. We are currently restricted from paying any dividends or repurchasing any stock due to our restricted payments basket covenant in our senior note agreement. And at 9/30 this basket had a negative $70 million. We continually focus on our liquidity and capital needs.

In summary, we continue to see very challenging market conditions and continue to focus on reducing inventory expense, debt levels and generating cash.

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

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

Good afternoon guys.

Ivy, how are you?

Good, thank you. I think that one of the biggest concerns as it relates to builders right now is understanding the cash flow needs and cash generation in 2009. And realizing you've got a lot of finished lots, which means you don't have to develop a lot, that's good. I don't know if you said this Phil and I apologize if you did, but can you give us your expectation for land spend in 2009, both for option takedown as well as land development? And then to follow on that, to talk a little bit about what your expectations for cash flow would be even if orders were to continue to weaken? Can you in fact generate cash even in a declining market environment, given you're selling a lot of spec possibly as well as other land sales you can generate?

You know Ivy those are really great questions and things that we focus on constantly. We do a lot of different financial scenarios and projections, putting those type of projections out publicly in today's world is pretty difficult. We obviously want to continue generating positive cash every quarter. And we're really focused on that. You're exactly right. We do have 4,000 lots that we want to push through our pipeline. We also have been managing our spec levels a little tighter. And we've pushed those down some during the third quarter. We do have the cash tax refund coming in next year

As far as land spend on the new land and also land development, we talked this year about spending $30 on land and $40 on development. It's hard to project those numbers. We are trying very hard to continue generating cash every quarter. As I said before, we only spent $3 million on land in the third quarter. We're seeing a lot of opportunities where we're being very, very careful. But it's just hard to project those numbers.

It is. And the only other thing I'd say is while on the one hand we're pleased to state that our SG&A was down 30% from a year ago, it's still too high. And we are in the process of further-- of taking further steps to hopefully achieve some meaningful reductions in our expense levels as we begin next year.

We're trying to minimize our operating losses as much as we can. But those are just difficult numbers to project.

You know Phil realizing that and thank you for trying to answer, if you look at your absorptions, you know they were only down 6% in the quarter. And clearly you said the Midwest and Columbus you actually had positive orders. Do you think that the Midwest is unlikely to require less incentives going forward? I mean you're doing better than the rest of the country.

Well I don't know. I mean there's a sense that the markets have been so sluggish, at least the three that we primarily operate in. Chicago's new and it's very small. And we're going to move very cautiously there. But Columbus, Cincinnati, Indianapolis have been under siege frankly since 2005. They first began to slow towards the end of 2004. They have not gotten any better. I'm not sure they've really deteriorated much further either. The permit levels are down. There's less competition. Builders have pulled out of the market. We feel that we're gaining market share, clearly in Columbus we are. And we're probably gaining market share ever so slowly in Cincinnati as well. I'd like to think that we're sort of incentived out in those markets. Who knows?

And but we're also I mean-- at one time we owned 20,000 lots and now we're down to 9,500. We'd really like to drive those owned lots down to a three-year supply. And at current run rates, that would be a 4,000, 5,000, 6,000 lot supply. And one of the reasons we had a fair amount of impairments in the Midwest in the third quarter is again we are being a little more aggressive there, trying to drive through some of this land, especially the finished lots. Also some of our land sales were in the Midwest in the third quarter. So we're trying to balance everything off. But most importantly, trying to make sure we generate cash and stay liquid and those type things.

If I don't choke to death, I'm going to ask another one. In terms of the impairments you took in the Midwest and if you did this again Phil, I apologize. But can you breakout the land impairments and by market and JV impairments? And then looking at your change in price, you know your closing price down 8%, one of the things that we are looking at is, on your sticks and bricks, excluding land, are you finding that you're at a point right now where there's some markets where it doesn't make sense to move forward because the economics are not there and maybe there's competition from foreclosures where they're competing below replacement cost? Maybe you can elaborate on if you're seeing any challenges in that arena after the impairments please.

Want to talk about the impairments first?

Impairments first. When you look at what we did in the third quarter, the impairments were about $44 million. And of that $44 million, about $28 million of it was on land we intend to build homes on. And when you break that down, about half of that was in the Midwest. Then when you start looking at the land piece, the land piece was about $12 million. And that was either on land we sold or intend to sell. And when you break that $12 million down, there was about $4 million in the Midwest, about $7 million in Florida and a little bit in the Mid-Atlantic. So again, overall about half of our impairments in the third quarter were in the Midwest. But just in the third quarter, we drove our owned Midwest lots down by 10%.

The foreclosure situations it's really--

And I'm sorry Bob, what about the JVs? I'm sorry Phil.

JVs, we actually impaired down $3.7 million. And of the $3.7 million, the biggest part was Florida. In the one JV that had outside financing on it that was $2.5 million. And the other $1.2 was in the Midwest.

We've been asking that, as to the foreclosure question, we've been asking that same question of our managers. Just for what it's worth, I drove 14 communities yesterday, of our communities in Columbus and probably another half a dozen of our competitor's communities. And quite honestly, in those communities did not see, I mean to the extent you could tell, did not see much evidence of any negative impact from foreclosures directly in those communities. Now clearly, clearly it's a cloud over the industry. Clearly it's going to affect in some respects appraisals at certain levels. You know if a house is foreclosed and we're trying to sell a new house and the foreclosed house is within the relevant submarket, I'm sure it's going to have an impact on appraisals and so forth. It's very, very difficult to know exactly what the direct impact of that is. I know it's out there. But we don't seem to be seeing it as something that's hurting our sales day to day, at least at this point.

Within Columbus?

That's well or frankly any of our cities. I mean we've asked that question and we're trying to get our arms around it right now. It's out there. There's no question. I'm not saying it doesn't exist. And I know that there's an impact from as I said in terms of the appraisal lines and so forth. But we don't seem to be fighting it in our communities to any large extent. Paul, I don't know, you would be closer to it with M/I Financial.

I guess the one of the-- the foreclosures tend on the new construction site to be very, very concentrated. And either you're hurt very badly by them or you're not. And so as far as this going through our subdivisions, we don't seem to have any concentration of foreclosures. They certainly have not had the significant impact on our appraisals yet. We'll continue to look--

The new home communities that seem to be really plagued by heavy foreclosures tended to cater to the low end of the low end. And I'm not saying those are the only ones. I mean there's examples of foreclosures in even the custom home area out there. But the preponderance of foreclosures appeared to be at the very low end of the buying spectrum. And that's not ever been our business.

Yes because if you look over at 9/30, you know round figures our average sell price and backlog in the Midwest is $250. In Florida it's $300. The biggest reduction we've had in sales price has been in the Mid-Atlantic. You know today we're like a little over $300. But a year ago in the Mid-Atlantic, we were a little over $400. A lot of that's been driven by D.C. So it really is a subdivision price point location business. I mean it's definitely out there. But it's just very, very hard to get a gauge on. But we're definitely looking for it very carefully.

Great. Thanks guys.

Thank you. Other questions?

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

Yes, hi Bob. Hi, Phil.

Hey Alex.

Alex.

Wanted to ask you Phil if you have like the benefit of prior impairments on your gross margins this quarter?

The number we gave out Alex was $8 million for our housing gross margins.

Okay. The other question I wanted to ask you was as it pertains to your cash flow, do you have some kind of ballpark number of how much cash you guys are generating per home at this stage?

No, that's kind of hard to come at. Obviously it differs. We're trying to drive as much of our business as we can over those 4,000 finished lots. Who knows, we spent all those dollars. And but right now, depending on the community, a third to a half of our business right now also tends to becoming from specs. So that's a hard question to answer when you look again at that, the $17 million generated in the third quarter. You know we did get $6 million from land sales. We've had land sales of $30 million so far this year. And then we did drive the spec levels down about $11. But we're trying to drive down our community count as Bob said. So when we get down to the last five or ten communities in a subdivision, you know sometime we'll spec those out a little more aggressive if we can't make any kind of decent deal to sell the lots. But you have to look at each one a little bit different. But we're definitely trying to focus on those 4,000 finished lots. At one time, we had almost 6,000.

Right. I mean when you say focused, is there a chance you guys might repeat the kind of like a bulk sale this year to take advantage of 2006 taxes?

We already have the bucket full as far as 2006 taxes Alex. You know getting that $40 million, we already have that bucket full.

Alex, we couldn't repeat that right now I don't believe. I mean if we had-- my guess is and I say this just cause there's-- just to be perfectly blunt, if we went back-- that was 14. I think it was 14 different transactions that closed during the fourth quarter of last year that made up the nearly 4,000 lots. My guess is if we went back to all 14 buyers and said would you like to rescind, they'd say yes. And on average we generated in terms of before any tax credits, $0.40 on the $1.00. You wouldn't get that today. Now we didn't know that, you know things would deteriorate so much further. We did it because we felt it was there. Let's do it. Let's move forward. I don't think the opportunity is there to do that now. The remaining opportunities that we have to sell land are sort of on a much more isolated and less meaningful basis.

I mean we're trying to generate a certain amount of land sales every quarter for different reasons. I mean we're trying to reduce our lot count. We're trying to generate cash. And again we have sold $30 million this year. But we're trying to also make sure that when we come through this, we also as much as possible have good locations and good price points. But it's just hard. And we've also done almost all of our deals cash and carry, where there hasn't been any type of hooks on the back into us whatsoever. Because we have too much land. But it is just kind of harder and harder. Same thing we see. We only bought $3 million of land because we think that it's still a little early to be buying significant amounts of land.

That's right.

Yes well, you know I guess in hindsight that was a really good move. So that was a good thing.

Better to be lucky than smart. Better to be both I guess.

Yes well. That's right. As it pertains to down payment assistance, I know you guys gave the number. I'm just kind of curious what impact you've seen in the month of October and is there anything you guys are doing or trying to do to kind of replace maybe the buyers that or some other incentive to get those buyers that maybe aren't able to do the DPA anymore?

Interestingly enough, we had come back with a work equity program which was really the grandfather of down payment assistance. But in reality, we see a lot of the customers that are in the market today are working very hard to come up with a down payment. And I don't know that we can really point to anything at this point to say we are not selling as many houses because of down payment assistance.

Long term, the best thing that could happen to our industry-- I mean this is not going to win any popularity contest, at least within the homebuilding industry, but long term the best thing that could happen is for down payment assistance never to come back, at least unless it's a buyer that elects by his own or her own choice to finance 100% because they have the clear credit and wherewithal to do so. It was never a great thing. It was never a big part of our business. And I think that long term, it's not something that served the industry well. And I say that now with hindsight but also I believe it.

Yes, no I would agree with you. I'm not sure the NAHB would agree. But one last question if I could, I know you said you've already obviously cut pretty hard on the SG&A front. But if volumes head a little bit lower into 2009, is there more room to cut on the corporate side, in other words the fixed portion of cost?

You now Alex there is definitely room and we're working on that every day. And we do different scenarios as far as what we think our sales and closing volume will be next year. So we are continuing to cut costs, unfortunately including head count. The issue also as you know is what happens to average sale price and what happens to gross margin? So we're trying to work very hard on all those things.

I suspect that you'll see SG&A further reduction as we work into the first quarter of next year.

Okay. Appreciate it guys.

Thank you.

Thanks Alex.

Any more questions?

You have a follow-up question from Ivy Zelman with Zelman & Associates.

Thanks, sorry. I just wanted to go back because Bob it's a little confusing to me on the 3.5% down payment that was 3% that was eliminated for down payment assistance. Because in essence isn't that what you're proposing as part of the builders' plan is to basically gift the down payment again and then use a mortgage rate buy down? So I guess one of my confusions on this plan is why is it any different than DPA? In fact, it is DPA but now you're putting a mortgage rate buy down with it.

Cause we're in a crisis. And we've got to get-- we've got to stop falling prices.

But isn't it a risk that a lot of those people as they buy a home, that they'll default?

Hey, you know what, they're going to have to meet the new underwriting. And if they meet the new underwriting standards and it begins to stem the tide and bring buyers back in-- you know it'd be one thing if markets were more normal right now and the elimination of down payment assistance could sort of quietly go away and just shut the door. But I think that-- you know I think we have an extreme situation right now. Probably does sound like we're talking-- I'm talking out of both sides, but I think that we have an unusually severe situation right now. And I think that this-- if we're fortunate enough to see a housing package that provides a tax credit, I think it should be for a very short period of time whether it's three months, four months, six months, nine months, certainly no more than that. Enough to help restore some semblance of demand and start to stop the falling prices. Until prices start-- until prices quit falling, I don't think we've solved the problem.

Okay, thanks Bob.

You're welcome.

Your next question comes from Jennifer [Mashen] with Principal Global Investors.

Hi, I got on the call late. So I apologize if I missed this. What did you say the tax refund would be that you have coming in next year?

Nearly $40 million.

$40 million. And do expect that in the first quarter or you're not really timing of that?

It's going to be up when the government writes the check.

But we hope to get it in February or March, yes.

Okay, thanks.

At this time, there are no further questions.

With that, we appreciate you joining us and look forward to talking to you at the end of the year. Thank you.

This concludes today's conference. You may now disconnect.