M/I Homes Inc (MHO) 2008 Q4 法說會逐字稿

Good afternoon. At this time, I would like to welcome everyone to the M/I Homes year-end conference call. (Operator instructions). Thank you. Mr. Creek, you may begin your conference.

Thank you very much, and thank you for joining us today. Joining me on the call is Bob Schottenstein, our CEO and President; Tom Mason, our Executive Vice President; Paul Rosen, the President of our Mortgage Company; and Anne 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 non-public items with you. As for 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 conference 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 February, 2010. I will now turn the call over to Bob.

Thank you, Phil, and good afternoon, everyone. The results we announced this morning clearly evidence that these are very difficult times for home builders. The combination of weak demand, falling home prices, historically low levels of consumer confidence, mounting foreclosures and the increasing recessionary pressures dominating the general economy have resulted in what many regard as the most severe housing recession in decades, perhaps ever. After experiencing challenging conditions throughout most of 2006 and all of 2007, market conditions further deteriorated in 2008. For more than two years, we have been engaged in a predominantly defensive operating strategy, focusing on strengthening our balance sheet, reducing our debt and inventory levels, generating cash, and reducing expenses. We firmly believe that conserving capital and managing the balance sheet is the correct approach, given the severity of current market conditions. We have been consistent with our actions and have been proactive in doing that which is necessary during these unprecedented times. We remain committed to this defensive strategy, and believe it has served us quite well, as we continue to make meaningful progress in a number of key areas.

First, cash flow and debt reduction. The fourth quarter of 2008 marked our ninth consecutive quarter of positive cash flow. As a result, we ended the year with $33 million in cash on hand, and zero outstanding borrowings under our credit facility. That credit facility stood at $410 million at the beginning of 2007, and $115 million at the beginning of 2008. Second, our balance sheet. Our shareholders equity at year end equalled $333 million, with no bank debt, and no other significant debt maturing until 2012, and having just recently successfully amended our credit facility, we are positioned to work through this downturn and capitalize on opportunities that will occur when housing conditions improve. At the end of 2008, our net debt to capital ratio stood at 32%. This is one of the lowest levels in the home-building industry. Three, land. During 2007, we had tremendous success in selling off excess land. That success continued in 2008. Our own lot count was 8,800 lots at the end of the year, 40% less than a year ago. Our goal is to own about a two-year supply of land. Please know that we will continue moving through our 4,000 finished lots, and that we will continue to generate cash.

Four, expenses. We reduced our active community count by 12% from a year ago. Additionally, we reduced our investment levels and specs by over 40%, and with regard to SG&A expenses, they are down today 23% year-over-year. Further, we have taken our headcount down by nearly 60% since peak levels in 2006. Five, sales. As reported, our new contracts or sales for 2008 were 25% below 2007 levels. Though, new contracts were up 5% during 2008's fourth quarter, and for January of this year, just completed, our new contracts are 7% ahead of a year ago. This, despite the fact that our community count, as I said is down 12% from a year ago. The relative strength of our sales is clearly worth noting. It underscores the importance of quality, good product, customer service, and effective marketing.

During 2008, we undertook a number of steps to improve our business processes for the future. We reduced our operating structure down from 11 to 9 divisions, and centralized some back-end operations. We also reorganized financial functions in an effort to streamline and gain efficiencies. Additionally, we have reduced the number of plans we offer, improved our cycle time, and continue to look at how we can further reduce all of our costs. Within the next several months, we will be launching a new product line of what we consider to be best in class affordable homes. We are very excited about this, and we continue to focus on superior customer service. It shows. Last year, we received improved customer satisfaction scores in every single one of our divisions. We believe this is truly significant, given that we're one of in one of the toughest years the housing industry has ever seen, and one in which it would normally be difficult to receive high satisfaction scores.

Before turning things back over to Phil, I will briefly review our three regions. First the Midwest. Midwest housing markets remain soft and single-family permits continue to be down. For us our new contracts were up approximately 35% during the fourth quarter which is our first positive increase for this region in 16 quarters. While this by no means should be construed as an improvement in conditions, it should; however, be noted that we are outperforming the general market. At December 31, 2008, we owned approximately 5,200 lots in the Midwest, versus 6,400 lots a year ago, a 19% decrease. In Florida, general market conditions also continue to be challenging. Home prices continue to be under pressure as this market works off excess housing inventory, and like the rest of the nation fights very weak demand.

New contracts in our Florida region for the quarter were down 25% when compared to the prior year, homes delivered were down approximately 50%, compared to the same period in 2007. At December 31st, of 2008, we owned approximately 1900 lots in Florida, versus 5,300 a year ago, a 64% decrease in owned lots. Finally, the mid-Atlantic region. New contracts for the mid-Atlantic region were up 24% for the fourth quarter, while homes delivered were down approximately 40% when compared to the same period of 2007. At year end we owned approximately 1,700 lots in the mid-Atlantic region, versus just over 2,000 a year ago, a little more than a 15% reduction. Our Raleigh and Charlotte markets weakened considerably during the second half of 2008. Not withstanding this, we believe we are well positioned in both of these markets. The D.C. market also continues to be challenging, but we believe we're making progress there as well. Now I would like to turn matters over to Phil, who will review our financial highlights.

Thanks, Bob. New contracts for the fourth quarter increased 5%, and our new contracts in January increased 7% over last year's level. Our cancellation rate for the fourth quarter was 31%, down from 49% in the fourth quarter of last year. Our traffic for the quarter decreased 11%, our sales were down 21% in October, and traffic was down 4%, sales were down 8% in November, while traffic was down 20%, and our sales were up 54% in December while traffic was down 9%. Our active communities decreased 12% from prior year's level of 146 to 128. The breakdown by region is 73 in the Midwest, 25 in Florida, and 30 in the mid-Atlantic. Homes delivered in '08's fourth quarter was 554, down 44% from last year's 984 and we delivered 71% of our backlog this quarter, compared to 70% in 2007.

Our fourth quarter results included pre-tax charges of $53 million of impairments, consisting of $39 million related to land that we intend to build homes on, and the $39 million is broken down by $18 million in the Midwest, $8 million in Florida, and $13 million in the mid-Atlantic. $4 million related to write-off of deposits and pre-acquisition costs for land deal that we no longer intend to pursue. $4 million related to land that we sold, and $6 million related to our investment in joint ventures. The fourth quarter impairments represented approximately 2600 lots in 66 communities, with 42% of the impairments in the Midwest, 26% in Florida, and 32% in the mid-Atlantic. Over the last 2.5 years, we have incurred pre-tax charges totaling $432 million of impairments, and have impaired over 50% of our owned lots, and have impaired 97 or 76% of our active communities. With respect to total impairments taken to date, approximately $10 million reversed into housing gross margins in the fourth quarter of '08.

We continue to evaluate our assets each quarter, for the standards of FAS 144. It is possible depending on market conditions that the Company will incur additional impairment charges in the future. Our gross margins exclusive of the impact of the aforementioned inventory and investment impairment charges were 9% for the quarter, and 12% for the 12 months ended December 31, '08. Our margins reflect our focus on generating cash and reducing our land investment. Our margins and our year-end backlog are about 10%. G&A expenses were $26 million in the fourth quarter, which included $5 million of land abandonment charges, and $1 million in severance cost. G&A also included $3 million for the writedown in estimated value of our Company aircraft, which we have listed for sale. Excluding these items, G&A for the quarter was $17 million. Selling expenses for the quarter and 12 months ended December 31, '08, decreased $10 million, and $24 million, respectively.

We continued to work on reducing our expenses. We currently employ about 500 people, which is down 41% from prior year end. Interest expense decreased $1.4 million for the quarter, and $4.1 million for the year. The decrease in the fourth quarter was primarily due to the decline of $4.2 million in interest incurred to $4 million. This was primarily due to a reduction in our weighted average borrowings from $465 million last year, to $229 million this year. And our quarterly weighted average borrowing rate was 7.8%, compared to 7.5% a year ago. During the fourth quarter, exclusive of asset impairment charges, abandonments, and severance, we had an $18 million loss from operations. We are focusing daily on reducing this operating loss. We have $26 million in capitalized interest on our balance sheet at year end, compared to $29 million a year ago, which is less than 4% of our 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 $29 million for the fourth quarter, and $109 million for the year for a valuation allowance related to our deferred-tax assets as required by FAS-109. At December 31, '08, our net deferred tax asset is zero, and we do not expect to record any additional tax benefits until we return to profitability. We do have a $39 million tax receivable on our books, and we expect to receive these cash refunds in the first quarter of this year. If the economic stimulus package is approved as we understand it, allowing for a five-year carry back of taxable losses, we could have an additional $80 million available for carry back, with $20 million available for our '08 tax year, and the remainder available for '09 tax losses. Now Paul Rosen will address our mMortgage Company results.

Thank you, Phil. Mortgage and title operations pre-tax income decreased from $1 million in 2007's fourth quarter to $587,000 in the same period of 2008. The change was primarily the result of a 44% decrease in loans originated from 812 in 2007, to 455 in 2008. Additionally enhanced financing is being offered to M/I Homes customers to help generate sales, lowering overall margins. Loan to value on our first mortgages for the fourth quarter was 88% in 2008, compared to 85% in 2007's fourth quarter. For the quarter, 47% of our loans were conventional with 53% being HFA VA. This compares to 90% and 10% respectively for 2007 same period, approximately 80% of our communities are now eligible for FHA financing.

The percentage of closings in the fourth quarter where customers received down payment assistance was 14% versus 5% for the same period in 2007. We no longer offer a down payment assistance program. Overall our average total mortgage amount was $226,000 in 2008's fourth quarter. The average borrower credit score on mortgages originated by M/I Financial, was 718 in the fourth quarter of 2008. The same as 2008's third quarter. These scores compare to 728 in 2007's fourth quarter, and 726 in 2007's third quarter. We sell our mortgages along with their servicing rights to a number of secondary market investors. Our main investors in the fourth quarter were CitiMortgage, Wells Fargo, Chase, and Countrywide. We have not repurchased any mortgages this year. Our mortgage operation captured 89% of our business in the fourth quarter, compared to 2007's 86%. I'll now turn the call back to Phil.

Thanks, Paul. As far as the balance sheet summary, our total home-building inventories at 12/31/08, decreased $281 million or 35% below prior year levels. Total building sites owned and controlled as of 12/31/08 totaled 9700 lots which includes our share of joint ventures, 90% of which were owned, and 10% of which were controlled. These reflect reductions of 30% and 40% from a year ago. The mix of lots owned and controlled are 59% in the Midwest, 20% in Florida, and 21% in mid-Atlantic. With respect to our lots under contract, we have $4 million at risk, and deposits LCs, and pre-acquisition costs at year end.

Our unsold land investment year end is $329 million, which is 8,000 lots, compared to 484 million, which was 11,000 lots a year ago. Compared to a year ago, raw land decreased 47%, land under develop decreased 24%, and furnished unsold lots decreased 28%. At 12/31/08 we had 67 million of raw land, 73 million of land under development and 189 million of finished unsold lots. And the finished unsold lots, as Bob stated, represent 4,000 finished lots and we're constantly focused on getting these finished lots through our system to generate cash. The market breakdown of the $329 million of unsold land is $147 in the Midwest, $61 million in Florida, and $121 million in the Mid-Atlantic region. In the fourth quarter we purchased $8 million of land, and $23 million of land for the year. Our current estimate for 2009 land acquisition purchases is similar to 2008. As to land development expenditures, we spent $40 million in 2008.

We currently estimate to spend about $15 million on land development in 2009. At 12/31/08 we had $13 million invested in joint ventures down 67% from $40 million a year ago. These joint ventures are for land acquisition and development purposes only and are all with home-building partners. We have one joint venture with third-party financing. In that one we are a 50/50 partner with a large public builder. And that loan does have a loan to value maintenance ratio. This venture has a debt of $12 million and partners equity of $15 million. At the end of the quarter we get $70 million invested in specs, 242 of which were completed, and 189 specs in various stages of construction. This translates in to about three specs per community, and of the 431 total specs, 180 are in the Midwest, 111 are in Florida, and 140 in the mid-Atlantic. And at 9/30/08, we had 479 specs with an investment of $82 million.

At 12/31/08, the Company had no borrowings under its credit facility and had $33 million in cash effective January 15th of '09, we amended our bank credit facility. This amendment makes certain covenants less restrictive such as tangible net worth being reduced to $100 million. It requires collateral, and reduces the facility to $150 million. It also prevents us from purchasing our public date. The facility maturity date remains October, 2010. Our borrowing availability under the terms of our amended agreement is currently $65 million less outstanding letters of credit or $30 million, which is the initial six-month period under the agreement. This availability will increase as we secure assets. Customer deposits were $4 million at year end, and represent 3% of our backlog value, the same percent as a year ago.

The Company also announced that on January 15th, 2009, our board of directors approved, subject to adoption by our shareholders, an amendment to its amended and restated code of regulations to restrict certain transfers of the Company's common shares for the purpose of protecting certain tax benefits primarily net operating loss carry forwards from the limitations of section 382 of the internal revenue code of 1986 as amended. In cash provided by operating activities for the three and 12 months ended December 31, '08, was $23 million and $149 million. It was our ninth straight quarter of positive operating cash flow. In the fourth quarter of '08 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. We continually focus on our liquidity and capital needs. We are not making any cash flow projections for '09 due to the difficult environment that we are facing; however, as we have frequently stated continued positive cash flow is a very big goal for us. This completes our presentation. we will now open the call for questions and comments.

(Operator instructions). Your first question comes from the line of Ivy Zelman with Zelman & Associates.

Hi, guys it's actually [Dennis Magill] on for Ivy, how are you?

Dennis, how are you?

I'm good thanks. I just have one quick numbers question and kind of two big picture questions. So on the land sales in the quarter, what was the total COG associated with that?

There was very little land sold. The revenue was only a couple of million. So, I'll have to get back to you on that, Dennis, but it was just not very significant in the quarter.

But the $4 million impairment that you said was land related would be related to those sales or is that on land that you still own?

I think both are in that number. Let us get back to you on that, Dennis.

Okay. No problem. The first big picture just has to do with -- when you guys think about your cost structure, you mentioned in the quarter you have obviously taken some costs out, but if you look where you guys were at the peak on the GS&A line down around 30%, but revenues down 55, 60%. How can we think about that moving in to '09, because it seems like it is very likely that revenues are down again, so this cycle is making it very difficult to keep up with the revenue declines, and the cost structure certainly doesn't seem to be aligned. So what kind of levers are you guys going to be able to pull next year? And how should we think about that overhead burden as the top line continues to fall.

That's a good question. Let me take a crack at it. First of all, we -- and we might have been a little late in being as aggressive as we were. We were continuing to cut costs and reduce expenses. But we very sharply intensified our focus during the last four months of last year, and have now, as I said before, effectively on a like-to-like basis reduced our run rate by over 20%. Obviously if our top line revenues backing out extraordinary items, were to stay the same in 2009, as they -- as they did in '08 -- and we're not anticipating that -- but if they would, then our SG&A as a percent of revenues would fall significantly. We're just going to continue to manage it.

We'll -- we're -- as we -- as we sit here today, and since the beginning of the year, we have already taken steps to further reduce our SG&A, and we'll continue to do what we can to get it in line. I think sometimes the percent game can be a little bit misleading when you take in to account things like average selling price, and just the sheer size of the Company, but, you know, we're doing all we can in that area. We think we're on the right track. Frankly we feel the same way about our sticks and bricks, and reductions that we're starting to be much more focused on now. We have experienced brick and mortar reduction in every one of our divisions for each of the last two years, and we have monitored it on a monthly basis. We have intensified that effort as well, and expect to-- and expect to see further improvement there.

Do you think if revenues were down, let's say 25% in '09, do you think your SG&A absolute dollars could be down more?

We don't give any kind of predictions like that. You know, as Bob said, we're working on it very, very hard. We cut our headcount 40% last year. If you look at G&A in the fourth quarter with the unusual items out of it G&A was below $20 million. Obviously some of the selling expenses are variable. We've also have gone through and looked at everything out there, so, again, we don't give any public predictions on that, but we're working very, very hard on the SG&A line as well as the hard costs sticks and bricks, et cetera, so we'll continue to make progress on that.

That's fair enough. The other question I had, it's looking like the tax credit that has been talked about in the government stimulus package is likely to be included, and let's just assume that it's a $15,000 credit. There's no repayment, but you have to file -- you are not going to get the cash right away. It has to come when you file your taxes. How do you view that as far as being a help to the market, given -- it is going to offset the fact that people don't have the cash for the down payment or it's difficult to sell your house if you are trying to trade up? How do you guys see what that could be.

We'll see. Look, it's -- I think you know where we stand. We stand with essentially all of the other builders in pushing for the fixed-housing first principals which called for a monitizable credit that could be used for a down payment. This is not that, but this is a whole lot better than the weak completely ineffective $7,500 so-called credit that was enacted last year. I think will be help because the number is not insignificant. I think what Congress is saying is that they want to make sure that buyers have skin in the game when they close.

Having said that, I have got to believe it will help. How much remains to be seen. We -- we believe, and I think that this view, as I said is shared by virtually every other builder, and frankly by many, many associations and organizations around the country that a more forceful stimulus package could really begin to stimulate demand and stop falling house pricing. We're not seeing that yet, packaged into this so called stimulus plan. If this is all that we get, though, it is better than what we have got right now, and it's likely to help sales a little bit. I think it is a net plus. How much? Some people are estimating it could be as many as half a million sales. We'll see.

Thanks again, guys.

Dennis. Anne Marie Hunker will give you a call back. The land sales in the quarter, the revenue was a little less than $3 million, and just some scattered lots in the Midwest, couple in Florida, and a couple in the Carolinas, wasn't anything real significant, but she'll give you a call back and go over the cost side of it.

Great. I appreciate it, guys. Thanks.

The next question comes from the line of [David Frank with Ligner Asset Management]

Hello, this is Dave Frank from (indiscernible) asset management.

Hi, Dave.

Bob, maybe you could give a little general color on what you are hearing from your sales teams on the ground in the various markets as to what type of properties are really selling, and, what -- what's a typical profile of buyers these days that are maybe showing you that little bit of uptick that you are seeing?

That's a really good question. Clearly, the -- the strongest buying group is that group that does not have a house to sell, and that has a very high credit score. We think that we have had very compelling marketing messages and proposition, and we think we have got good communities, and we think we have priced them right to sell, and we think that may be one of the reasons why our sales comps really aren't too bad. They're no where near where anyone would like them to be. Our margins aren't where we would ideally like them to be, but we don't think -- we think it's better when we sell than when we don't, and accordingly we have managed our Company that way. But I'd say that the preponderance are-- of the few buyers that are out there would fall into the category of those without a house to sell or those who's house has sold and feel unencumbered about buying.

So it sounds like the sweet spot may be the 150 to $200,000 house, for a first time buyer.

Maybe a little higher than that, because that -- I think the sweet spot is going to be under $200,000 in -- in-- for a single family detached home in most of our markets, and I think it's going to be to a first time buyer, and I alluded to the fact that very soon we'll be launching a new line of what we think is a best in class or very strong -- very strong line of affordable homes, and we hope to capitalize on some incremental business with rates as low as they are, and now that we have got-- it appears to be $15,000 tax credit, we want to make sure we want to capture whatever is out there.

If you look at what has happened to us, David, as far as average sale price in backlog, when in '07 at 312, at June 30th we were at 289 and at 12/31 we were at 247. so obviously our average sale price has come down a fair amount. Recently also, we have been selling about 40% first-time buyers, which is (inaudible) historical for us, so that definitely reinforces what Bob said.

What is your take on the predominance of FHA deals among your buyers? I know you gave the number out. Is that a sign that people don't have down payments or what -- what is the -- what is the meaning of that going forward?

Well, I think those people believe and we do too, that most buyers are going to be FHA, as we look ahead. Paul, I don't know if you want to add anything to that?

We have seen, as Bob has said, half of our buyers are really FHA buyers with 3.5% down.

Right.

We don't see anyone really moving forward and putting a lot of large cash in to the transactions right now. Those deals are few and far between.

Okay. Thank you very much for that detail. Appreciate it.

Thank you. Okay.

The next question comes from the line of [Lee Braiding, from Wachovia].

Hi, guys.

Hello, Lee.

Thanks, as usual you guys give a good amount of information on the call. I did have -- with regards to the new product line that you talked about coming out in the next few months, and the sweet spot. It sounds -- in the communities you have now, how much further can you continue to bring down price to I guess get closer to that sweet spot?

Well, that's a great question, and we think we have got -- let me put it this way -- we think we have meaningful opportunity not in all, but in many of our markets to launch this product on lots, on the ground now, and I'm not going to say how much we're going to bring down our price for two reasons. One, I'm not prepared to; and second, I don't think it is in our interest to yet. So -- but we do think that we're going to have profitable, marketable product, and -- and it has been designed to fit on lots that are finished and that are ready to go, and we're eager to get moving on it.

Is this something that when you roll out, how do you feel about rolling out? Do you roll it out to all of your regions or region by region?

No. Initially it will be tailored primarily for the Midwest, then likely to the Mid-Atlantic. Florida is working on some different things, but -- so it's not -- it's not the same.

Okay. And I was wondering on the gross margin you mentioned that it had come down to about 9% this quarter. And I was wondering does that vary by region dramatically?

Lee, I would say no, it really does not. We also said our margins in backlog were about 10%, but, again, a few quarters ago we had 6,000 finished lots. Today we have 4,000, we're trying to drive through those. We are in the subdivision business, our community count is shrinking, but as you see by our lot holdings, we still have, especially in the Midwest, a little more investment that than we would like to have. So we're working (inaudible) through things.

Okay, great. And just kind of a number things on the taxes. You talked about if the five-year carryback happens and I just want to make sure I heard this right. I think I heard $80 million that you could take back. Is that $80 million in refunds you could potentially get this year, or $80 million -- is that a net of tax number, I guess is what I'm trying to get at.

An $80 million number in total. $20 million would be available for the '08 tax year, which means we could get that this year, but the remaining 60 would apply to the '09 tax losses.

Oh, okay. Got it.. All right. Thanks very much.

Thanks.

The next question comes from the line of [Jim Wilson, with JMP Securities].

Hi guys, good afternoon.

Hey, Jim.

Hey, Bob. Couple of questions, if I'm doing my math right, I guess, Phil in adding back the impairment, you might have mentioned a number, but I didn't get on at the beginning of the call -- but the gross margin x impairment is right around 11%; is that roughly correct?

No, actually the gross margins for the quarter, throwing out the impairments on closings was 9% for the quarter, and 12% for the year.

9%. Okay. And I guess within that, can you give any color on where you think you stand on seeing lower material costs, lower labor costs, kind of work their way through, obviously a lot you have taking employment impairments to help, but the prices keep getting cut in your face that obviously negatively impacts it, and how much improvement can you -- or do you feel you have seen in the hard costs of building homes?

Some, and we think we will see some more. It would -- I don't know that I can comment on the specific. We do expect our bricks and mortar cost to further reduce and in effect improve our bottom line without closing another house, but the extent to which that occurs without closing any additional homes, I should say -- to the extent -- to which that occurs, I just don't think I can say that at this point.

We have set different targets on a division level, because Bob's been working on this for a couple of years, and we're coming at it from the national account area, we're also coming at it from a local level, but we do have specific targets, we really dono't want to comment on that publicly but we are working hard on the stick and bricks side.

Okay. Great, and then the other question is on lot options, structure, and terms. You have obviously reduced it plenty, but are you and what is -- you are still in or committed to? Have you been able to change terms? And if so, what do some of the deals look like?

We have, and I mean -- I don't know that there's a-- it would be-- you got to start with this. You know, before the market turn, we were internally developing close to 80% of our communities, so we didn't have, a large stable of what you could call option contracts out there within which to renegotiate, I wish we had, but we didn't. So of the option agreements that we have left, and that we haven't walked from, you know, we have for the most part had some success in renegotiating, in some cases more than one or two or three times.

Extension of takedowns, lot price reductions, skipping takedowns, moratoriums and so forth on takes. They are sort of all over the map. In a lot of cases they haven't come down as far as we would like, and when that has occurred we have walked, and we haven't been shy about or reluctant to walk when we felt it was necessary.

If you look at our lots under contract at this end of this year, it was only 900 lots. At the end of last year it was 2400. So we definitely have cut down on our option lots, again, staying focused on the 8800 lots we own. Since we're trying to get down to that two year supply, we still own too many lots, so we're trying to work through those, obviously first.

Right. Okay. All right. Very good. Thanks.

Thank you, Jim.

The next question comes from the line of [Alex Baron with Agency Trading Group].

Yes, hi, guys.

Hi, Alex.

I apologize you already discussed this, but I had a couple little trouble getting on early, but what was (lost sound) going from $17 million for the last three quarters to 25 this quarter?

Alex you got to repeat the question. We lost the middle of it.

Okay. I was saying what was the reason that the SG&A, the corporate SG&A went up by about $8 million this quarter?

If you look at the G&A, which was $26 million for the fourth quarter, that included $5 million of land abandonment charges, and it also included $1 million of severance cost. Also in G&A was $3 million for the writedown in the estimated value of our Company aircraft, which we have listed for sale, so if you excluded those $9 million of unusual items, G&A for the quarter was $17 million.

Okay. Got it. My second question was -- I was looking at your website, and you guys have an ad for 3.875% rate.

Were you interested in buying a house?

Sure. I was wondering -- I mean how much does that effectively cost you to do that. In other words if you didn't do that, or to run that program, how much are you having to spend to do that?

You know, Alex that's not something that we are going to disclose, obviously, but we think it has been a very effective program for us, it has been a very good traffic generator. It's primarily directed towards quicker closings, 30 to 60 days, but it has been a very, very effective tool for us.

Okay. My next thing -- I think I did hear you mention it, but it was a little fast for my writing. You mentioned the benefit from previous impairments to gross margin.

$10 million in the quarter.

$10 million. Okay. And then I guess my other question was given the pretty substantial level of writedowns we have seen to date, why do you feel like the margins are still 9%? I mean, why aren't they, like, going back higher, which I would assume would happen if-- given these writedowns?

Well, there is a couple of things there. And those are very good questions. You look from a balance sheet standpoint. Again, a year ago, we had almost $500 million of unsold land. At the end of this year, we had about $320 million. So we had brought our unsold land down quite a bit. Trying to move through the finished lots, trying to generate cash, so I think it's a combination, Alex, that we had a higher investment level than we wanted.

We worked through that. We also wanted to move through, especially the finished lots, and that impacted our margins some also. I also mentioned on the call, we have impaired about 75% of our communities. We think that, staying on top of that, and trying to focus on what market pricing is to continue generating some volume has been very important to us.

I think you got to look at all of these things, when you look at the the -- at -- you got to look at the whole canvas, I guess is the way I put it, and I know that you do, and I appreciate that, and first of all, the market has continued to deteriorate, but, I think that -- that -- our sales for last year were down 25% from '07, as I said earlier in the call, we wished they weren't down that much, but I think that compares somewhat favorably with many others in our industry. Fourth quarter our sales were up 5% year-over-year, and in January, the month that just ended, our sales were actually up 7% from a year ago. I don't think that's as -- I think that's a combination of a number of factors, whether it be product, service -- customer service, effective marketing, pricing strategies, all of these things relate, as you know. So I think that, we're trying to, reduce our investment levels and generate cash, and -- and work through things that we don't think get better as they get older.

Right. Now on -- I think you guys have definitely taken more realistic, I guess, impairments. I'm just -- I'm just surprised that you have taken 75% of your communities and other builders are still saying they have only impaired a third or 25%. I guess I'm wondering if that's more a statement of their -- less realistic, or if you think it is because you guys are more --

Well, the easy answer is, I hope they are right. Because if they are, then we have got a lot of lift ahead of us.

Yes. All right. Thanks a lot.

Thanks, Alex.

Return the next question comes from the line of [Larry Taylor]from Credit Suisse.

Hi, Larry.

Just a quick follow-up, you gave some information on the availability in the bank lines. Just to confirm, there are no impediments to you guys putting additional collateral in to have the full $100 million less whatever you have outstanding in LCs, is that your intent?

Larry, you are correct. I mean, we can collateralize as much as we want to get the collateralization process done tends to be a 90 to 120-day process, so we have started on that. But in the interim period, which is the first six months of the agreement, we're allowed to have $65 million available less the LCs. It's just matter of timing. We just did the amendment January 15th.

Right. And is your intent to collateralize -- no just to have the whole $100 million in case you need it or right now do you feel like you're not there yet.

Not there yet. Obviously it is an expense to do appraisals and record mortgages and all of those things. We will obviously collateralize some things to give our sales some room, but, we'll just deal with that on a 90, 120-day go-forward period, but, again, the whole thing is available to us, the $150 million.

Great. Thanks for that clarification.

Thanks.

(Operator instructions). Your next question comes from the line of Ivy Zelman with Zelman and Associates.

Hey Phil, I just wanted to clarify on the tax carryback potential. When you say $20 million potentially related to the '08 return, is that implying that you already realized losses that you just weren't able to go back and recoup yet, so that would be an immediate benefit?

That's right.

And you understand that's in addition to the $39 million?

Right. Exactly. And then the 60, when you are looking out a year, is that just based on what your assumptions are for what you'll realize within '09, or have you already realized part of that as well.

Well, if you go and add up what you have actually paid in taxes for the period, then you back off what you have got refunded or realized, and that's kind of a different number, and that's how you come up with the $60 million.

Okay. So you would have to sell land and/or homes to realize it to generate the carry back for the 60 --

You (inaudible) taxable loss.

It would depend on what the '09 taxable loss is.

You would have to turn your already impaired inventory.

Yes. But it would depend on what the '09 tax loss was, and again, whenever the rules get finalized we'll take a look at that. What you are alluding to is you do need obviously to liquidate the impaired inventory to get that tax benefit.

So 60 is the cap on what you could potentially get if you liquidated enough to get there.

The cap is 80 because that's the (indiscernible) the taxes we pay less what we'll get back.

Okay. I'm with you. Thank you.

Yes..

The next question comes from the line of Alex Baron with Agency Trading Group.

I'm sorry. How come you can only select 39 this year, not the whole 60?

(inaudible).

About 39 builds up the two-year carry back period. To get more than the 39, we have to go in to the new five-year deal.

Oh, okay. But you aid you already incurred the losses in '08, right?

That's right. We have another $20 million of taxes that we paid that we go to the '08 tax year that we could get back later this year if the law has changed.

Okay.

Okay? We just already filled up the two-year carry back bucket. As of today it would go 20 years forward. The new law goes back five. That's how we can pick up another 20 this year.

I get it now. Okay. Sorry.

No problem. It's not easy to get.

Did you give a number for any JV impairments?

$6 million. Yes, we did. Yes, when we looked at the impairments in the quarter, Alex of 53, of the 53, $6 million related to the JV investment.

Okay. Got it. Thanks, Phil.

Yes.

(Operator instructions).

If there are no other questions, operator?

No, sir, there's no further questions.

Thank you, very much, for joining us. Look forward to speaking with you at the end of the first quarter.

Thank you. This concludes today's conference call. You may now disconnect.