M/I Homes Inc (MHO) 2009 Q1 法說會逐字稿

Good afternoon. My name is Melissa and I will be your conference operator today. At this time, I would like to welcome everyone to the M/I Homes first quarter conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (Operator instructions)

Thank you. Mr. 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, President of our Mortgage Company, and Ann Marie Hunker, our Corporate Controller.

First, to address Regulation Fair Disclosure, we encourage you to ask any questions regarding issues that you consider material during this call, because we are prohibited from discussing significant nonpublic 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 April 2010.

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

Thanks, Phil, and good afternoon, everyone. As stated in our release issued this morning, we are pleased with our first quarter results as there are a number of areas where we have seen meaningful improvement or progress. We sold 667 homes during the quarter, a 20% increase over last year's first quarter, our best quarterly sales in 18 months and our second consecutive quarter with positive sales comps. We achieved this achievement in sales despite our community count being down year-over-year by 20%. And I'm also pleased to share with all of you that our April sales will exceed last year's level.

As a result of our improved sales, our backlog units are up for the first time since March 2006. Our gross margins for the quarter, while below last year, nonetheless improved by 400 basis points from our gross margins in the fourth quarter of last year. And we continue to make meaningful progress in reducing our expense levels and improving our cost structure.

During the past year, we reduced our SG&A by 33%. These reductions, together with our improved gross margins are principal reasons why we were able to narrow our operating loss by 35% from the fourth quarter of 2008, even though we had fewer closings. Specifically, we lost $11.9 million from operations on 394 closings during this first quarter. That compares to an operating loss of $18.2 million on 554 closings during 2008's fourth quarter.

Clearly, our overriding objective is to return to profitability. Our narrowing loss together with improved sales and margins, however, confirm that we are headed in the right direction. Though we are not there yet, we are getting closer to breakeven. And once we achieve breakeven, we can then proceed towards sustained profitability.

From a balance sheet standpoint we ended the quarter with $65 million cash on hand marking our 10th consecutive order of positive cash flow. We have zero bank borrowings and no debt maturing until 2012. Our net debt-to-capital ratio stands at 30%, one of the lowest debt levels in the home building industry.

As recently announced, we have introduced a brand new line of innovative, affordably priced homes. We call this our eco series, and these homes offer a smart, new approach to home building that responds to the way people choose to live today. Our new eco series is more efficient, more environmentally responsible, and affordable. Clearly our eco series will appeal to first-time homebuyers, but there is no question in our minds they will also appeal and attract those wishing to downsize and also empty-nesters. We're very excited about this new -- these new home designs and believe they represent the best in class in affordable housing.

We also recently announced that everyone -- every home we now build in every one of our markets is 100% Energy Star qualified. This not only shows our commitment to the environment, but we believe it also goes to addressing the needs and wants of not only today's buyers but tomorrow's buyers. It should be noted that nationally less than 20% of all home builders meet the strict 100% Energy Star guidelines, and we're very proud that we do.

Before I conclude, let me briefly review our regions. First, the Midwest region. Our new contracts were up 45% during the quarter when compared to 2008. This is our second consecutive positive quarter in the Midwest and it -- and, frankly, has exceeded our expectations. Our Cincinnati operation had a very strong quarter in sales and we've now opened our second community in Chicago, which is also experiencing fairly brisk sales.

At March 31, 2009, we owned approximately 5,200 lots in the Midwest. This compares to 6,200 lots one year ago. Homes delivered in the Midwest for the quarter were down approximately 5% when compared to last year.

In our Florida region, market conditions continue to be quite challenging. We're competitively priced, so we continue to offer incentives and promotion as this region works to work off excess housing inventory. New contracts of homes delivered in this region for M/I for the quarter were down 25% when compared to last year. At quarter's end, we owned approximately 1,800 lots in our Florida region. This compares to 4,200 lots a year ago, or a decrease of over 55%. Additionally, we have reduced the number of active communities in which we operate in Florida by 11 from one year ago.

Finally, in the mid-Atlantic region, new contracts were up approximately 25% for the quarter, while homes delivered were down about 5% compared to first quarter of 2008. At March 31, we owned approximately 1,500 lots in the mid-Atlantic region versus 2,000 a year ago, or roughly a 25% increase. General market conditions continue to be challenging in the Raleigh and Charlotte markets, but we feel very good about our position throughout the mid-Atlantic.

Looking ahead, we are focused on building on the momentum generated during the first quarter. Though we have clearly started to see some glimmer of improved market conditions in some of our markets, it's far too early to call it a sustainable trend. The general economy remains weak and there's far too much uncertainty to make any bold predictions. We will, therefore, continue to execute and employ a predominantly defensive operating strategy. This conservative approach has served us well during this downturn, and we believe it will continue to do so in the future.

And with that, I'll turn it over to Phil.

Thanks, Bob. New contracts for the first quarter increased 20%. Our cancellation rate was 20%, down from 23% a year ago. Our traffic for the quarter decreased 10%. Our sales were up 7% in January, while traffic was down 29%. Sales were down 5% in February and traffic was down 8% and our sales were up 76% in March and traffic was up 7%.

Our active communities decreased 20% from a year ago of 148 to 119 at March 31, '09, and the current breakdown by region is 68 in the Midwest, 21 in Florida, and 30 in the mid-Atlantic. Homes delivered in the first quarter were 394, down 12% when compared to '08's first quarter of 450. And we delivered 70% of our backlog this quarter compared to 63% in 2008.

Third-party land sales in '09's first quarter were $700,000, down from $13 million a year ago. And our first quarter results include cost of sales expense of $4 million, related to imported drywall issues. This charge relates to certain homes that we delivered in our Florida operations.

Turning to impairments. We continue to evaluate our assets each quarter per FAS 144. In the first quarter, we reported pretax charges of $11 million of impairments, consisting of $6 million related to land that we own, and $5 million related to our investment and joint ventures. The first quarter impairments represented approximately 1,000 lots in 20 communities, with 13% of the impairments in the Midwest, 61% in Florida, and 26% in the mid-Atlantic region.

We have impaired 87, or 73% of our active communities. And $10 million of impairments reversed into housing gross margins in the first quarter of '09. It is possible, depending on market conditions, that we will incur additional impairment charges in the future. Our gross margins, excluding impairment and drywall charges were 13% for the first quarter. G&A expenses in '09's first quarter decreased $5.6 million compared to the prior year. And selling expenses decreased $4.6 million. Total SG&A expenses were down 33% from a year ago.

We continue to work on reducing our expenses. We currently employ about 490 people, which is down 27% from a year ago. Interest expense decreased $1.2 million for the first quarter of '09 compared to '08. The decrease in the first quarter was primarily due to a decline of $1.7 million in interest incurred to $3.8 million. This was primarily due to a reduction in the weighted average borrowings from $307 million last year to $225 million this year. And our quarterly weighted average borrowing rate was 8% compared to 7.8% a year ago.

During the first quarter, exclusive of asset impairment charges and drywall issues, we had a $12 million loss from operations. We focus daily on reducing our operating loss and getting back to profitability. Also in the first quarter, we sold our plane, which resulted in $1 million loss, and we paid off the related loan. We have $26 million of capitalized interest on our balance sheet at March 31, '09, compared to $29 million a year ago, which is 4% 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 $11.7 million for the first quarter for a valuation allowance related to our deferred tax assets as required by FAS 109. At March 31, '09, our gross deferred tax asset is $121 million, which is fully reserved. We do not expect to record any additional tax benefits until we return to profitability.

If the five year net operating loss extension were to be enacted, we could receive up to $80 million in the next year.

Now Paul Rosen will address our Mortgage Company results.

Thank you, Phil. Mortgage and title operations pretax income decreased from $3.3 million in 2008's first quarter to $1.3 million in the same period of 2009. The decrease was primarily the result of below market rate promotional programs being offered to our customers and tighter margins within the secondary mortgage market. The number of loans originated remains steady in the first quarter of 2009 at 346 compared to 347 in the same period in 2008.

Loan-to-value on our first mortgages for the first quarter was 88% in 2009 compared to 85% in 2008's first quarter. For the quarter, we experienced a significant change in product mix. Our homebuyers predominantly chose FHA/VA financing over conventional. 54% of the loans closed were FHA/VA and 46% were conventional. This compares to 20% and 80% respectively for 2008's same period. Over 80% of our communities are now available for FHA financing. Overall, our average mortgage amount was $211,000 in 2009's first quarter. The average borrower credit score on mortgages originated by M/I Financial was 718 in the first quarter of 2009, the same as 2008's fourth quarter. These scores compared to 707 in 2008's first quarter and 728 in 2007's fourth quarter.

We sell our mortgages along with the servicing rights to a number of secondary market investors. Our main investors in the first quarter were Citi Mortgage, Wells Fargo, and Countrywide. We have not repurchased any mortgages this year.

Our mortgage operation captured about 90% of our business in the first quarter compared to 2008's 81%. March 31, 2009, M/I Financial had $20.4 million outstanding under the MIF credit agreement. In March 2009, we were notified by our lender that they were withdrawing from the mortgage warehouse lending business and would not renew her agreement which expires in May, 2009. Currently, we do not have any outstanding borrowings under this facility and do not contemplate burrowing under it again. As of yesterday, we have a new secured credit agreement with another lender that provides up to $30 million in secured mortgage warehouse line financing.

Now I will turn the call back to Phil.

Thanks, Paul. As far as the balance sheet summary, we constantly focus on our cash and liquidity. We ended the quarter with $65 million of cash, up from 12/31/08's $33 million. It was our 10th consecutive quarter of positive cash flow. Total home building inventory at March 31, '09, were $498 million, a decrease of $250 million, or 33% below March 31, '08.

Total lots owned and controlled as of March 31, '09, totaled 8,400, which includes 750 joint venture lots. 90% of these lots were owned and 10% were optioned, reflecting a reduction of 33% from prior year levels. The mix of lots owned and controlled are 61% Midwest, 20% Florida, and 19% mid-Atlantic.

With respect to our lots under contract, we have $2 million dollars at risk in deposits, letters of credit, and pre-acquisition costs at the end of the first quarter. Our unsold land investment, which excludes our joint venture lots, at March 31, '09, is $314 million, which is 7,700 lots. That's compared to $452 million, or 10,300 lots at March 31, '08. Compared to a year ago, raw land decreased 34%, land under development decreased 6%, and finish, unsold lots decreased 37%. At March 31, '09, we had $67 million of raw land, $77 million of land under development, and $170 million of finished, unsold lots. And $170 million of finished, unsold lots represents about 3,500 lots.

We constantly focus on getting finished lots through the system to generate cash. And the market breakdown of our $314 million of unsold land is $147 million in the Midwest, $58 million in Florida, and $109 million in the mid-Atlantic region.

In the first quarter, we purchased $11 million of land. Our current estimate for '09 land acquisition is approximately $30 million. As to land development expenditures, we spent about $4 million in the first quarter and currently estimate to spend about $15 million for the year in land development. And as of March 31, '09, we had $8 million invested in joint ventures, down 76% from $34 million a year ago. These joint ventures are for land acquisition and development purposes only and are all with homebuilding partners. We have one joint venture with third-party financing. In that one, we are 50/50 partners with a large public builder. The loan does have a loan-to-value maintenance ratio, and this venture has debt of $11 million.

At the end of the quarter, we had $45 million invested in specs, 134 units of which were completed and 217 specs in various phases of construction. This translates into about three specs per community. And of the 351 total specs, 156 are in the Midwest, 103's in Florida, and 92's in the mid-Atlantic. At December 31, '08, we had 431 specs with an investment of $70 million.

We collected $36 million in tax refunds in the first quarter, as we carried back tax losses incurred in '06. We expect to receive the remaining $3 million of our tax receivable in the second quarter of '09.

At March 31, '09, the company had no borrowings under its $150 million credit facility. Effective January of this year, we amended this facility. We made certain covenants less restricted such as tangible net worth being reduced to $100 million and the agreement requires collateral. The facility maturity date remains October 2010. Our borrowing availability under the terms of our amended credit facility is currently $30 million, and this availability can increase if we secure assets. We are mindful of the cost of securing assets to increase availability and will increase availability if needed.

In the first quarter of '09, 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 restrictive payments basket. We continually focus on our liquidity and capital needs. We do not make cash flow projections due to the difficult environment we are facing. However, as we have frequently stated, continued positive cash flow is a very big goal that we have.

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

(Operator instructions) We will pause for just a moment to compile the Q&A roster. Your first question is from the line of Ivy Zelman with Zelman and Associates.

Good afternoon, guys. It's actually Alan on for Ivy. First question, was wondering if you guys can have any comment on some of the activity we've been seeing in the bond markets lately. Several of your peers have successfully issued some debt at fairly attractive pricing. And I'm curious if you guys have entertained that, had any discussions with your bankers. And if so, kind of what do you think the appetite is for a small-cap builder such as yourself, as opposed to some of the larger builders up to this point that have been successful in raising debt?

Alan, from our standpoint, we think we're in pretty good shape as far as balance sheet liquidity and so forth, with our $65 million of cash, no borrowing under the revolver. We think we have the covenant such that we can borrow under the agreement if we needed through the third quarter next year. So we think we're really in pretty good shape and continue to focus on cash generation. I'm glad to see deals getting done. The credit markets seem to be opening up some. We do have conversations frequently with our board, with our financial partners. But right now we think we're in pretty good shape.

Okay. So it's not something that you think is imminent or view as a near-term must in terms of this opportunity in the market?

We think we're in pretty good shape. Again, we have those conversations frequently. But right now we think we're in pretty good shape.

Okay. And changing gears a little bit. Just was hoping to kind of get your view on the sequential improvement in margin relative to the, I think you had about a 10% drop in ASP in the quarter, and, like you said, part of that was driven by more of a shift to the entry-level, smaller-type house. But I'm curious, how much of that price decline would you say was mix-driven as opposed to just broader price cuts? And assuming there were some level of price cuts during the quarter, do you think that that improvement in the margin is sustainable?

Well, a couple things on that. Number one, the new line of homes that I mentioned in my remarks have only just been released within the last week. So there's no -- there's no impact whatsoever in our first quarter numbers, particularly our closings.

I think that most of the reduction that you're seeing -- well, it's a combination of two things, production and average selling price. It's frankly lowering prices which results in obviously lower margins. And there is a little bit of mix with those people that are buying, are buying the smaller houses that we had already been offering as opposed to our larger product offering. So I think it's some combination of all of that.

I think the reason we've -- and I'm not sure if you asked this or not. But I think the reason that we've seen our margins improve is largely as a result of some of the cost reduction efforts that we've undertaken to reduce our bricks and sticks and hard costs. And there's probably a little bit of maybe some pricing leverage, if you will. I don't want to misstate because it's very, very hard to really know. But we've seen a little bit of an uptick in demand and we've had maybe a little bit of an opportunity to hinge things. But it's mostly a consequence of improved sticks and bricks.

Okay. That's very helpful. I mean, would you be able to give maybe a couple of examples of markets where you have been able to push price a little bit and also maybe quantify some of those stick and brick cost reductions you've seen?

Let me just say this. First of all, and you've heard this before. We've repeated this statement probably too many times. But it's a subdivision business.

Sure.

And it's subdivision dependent. And during the last few months, we've seen our sales improve considerably in several communities in Cincinnati, in several communities in Columbus, and a few of our DC communities. We're also getting some of the benefits from some of our previous impairments, particularly in DC.

The other thing is is that I'll share with you that two of the more significant, if you will, land deals that we've recently done, one was in Raleigh and one was in Chicago, we bought them right -- we think we -- we thought we bought them right, let me put it that way. But now that we've opened these new communities, we realize we did buy them right, because we're selling homes at profitable margins. And so you've got a lot of different mixes in here. But it's just a lot of things at one time.

Got it. And that's really helpful. And I do appreciate the detailed answer. Thanks a lot.

Thanks.

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

Hey, guys. How you doing?

Hey, Alex.

I guess my first question was, you gave the sort of monthly breakdown in the sales. And I think you said in the month of March, sales went up 76%. I was kind of wondering, is that more a reflection of a bad comp or is that more a reflection like you guys cut prices or something that month or was that just demand suddenly showed up?

Well, if you look at last year, Alex, last year in the first quarter we sold like 550. We sold like 160 in January, 240 in February, and 150 in March. So last year, when you look at the first quarter comps, March was the weaker one. However, as Bob stated, we did sell 266 in March, which was the strongest month of the quarter. So it was a little bit of both.

But I think maybe a better way to look at it so there's not just simply an aberration is to take a look at the whole quarter. Sales were up 20%. Why is that? I think number one, conditions have not deteriorated further. Have conditions gotten better? They appear to have gotten a little bit better. We don't know if it's a seasonal tease, as I said before, or a sustainable trend. But there appears to be a little bit more demand.

There is no question in my mind that in a number of our market we're capturing market share. Our market share is on the rise. I think we market very strongly and I think that, very candidly, we've got the best trained sales force we've had, perhaps ever. And it's a little bit here and a little bit there. As a smart home builder once taught me, it's a onesie-twosie game, and you sell one here and one there and pretty soon you've got some volume. And I think that -- so I think it's just a lot of that.

Okay.

It's very hard to really know for sure because of all the uncertainties that just exist out there. But I think we've had good marketing and some good promotions and we're seeing I think some unusually good results comparatively speaking.

Right. When you say capturing market share, is that just kind of a function of kind of other private builders disappearing or something?

Again, I think it's a number of things. I can [passionately] say it's because we've got better communities and better products. But we also -- but I don't want to come across the wrong way.

But the other thing is, Alex, currently builders have capitulated in some of our markets, and there maybe is a little bit less competition. But I do know in two or three of our markets where I believe our market share is rising, it's rising more than other builders that are out there that are competing with us. So I think we're getting the extra sale.

Got it. Okay. That's fair. My other question was, I think you gave -- you said 73% of your communities have been impaired to date. Where are the other 27 that haven't?

I think they're kind of spread even, Alex. We go through everything every quarter. So I think they're pretty much spread evenly.

Okay.

If you look at the way the impairment's gone, of course, we used to have a lot more land in Florida and DC, and it depends on what you get through. But we probably did the most impairments initially, from a dollar standpoint, from DC, then Florida, then the Midwest and then some in the Carolinas. But I would say overall it's about split as far as where it is. We've impaired about 75% of them.

Okay. Well, that's fair too. My other question I guess is a little bit more theoretical in a sense. So given the impairments, I guess I constantly struggle why the margins continue to be kind of like in the 10% or whatever range. How come they're not going back to, I don't know, 15% or 20%? Is that just a function of something in the impairment process that doesn't allow that to happen or is that just a function that prices continue to come down and, therefore, it kind of takes away some of that benefit?

First of all, our margins for the quarter were 13%.

Okay.

So they weren't 10%. Why they aren't 15%, hopefully they're heading in that direction. But I don't know if you want to add anything to that.

I mean, a lot of that, Alex, is just the market conditions. I mean, you do still have competitors out there competing for a reduced amount of activity. You do have inventory out there. You have foreclosures out there. So you still have some pricing pressure. You know, as Bob said, in selective communities, we've been able to inch prices up. I mean, the impairment process, when you cut through it, pretty much once you get down to that 10% margin, you start looking at real [flows] for an impairment. But just because you impair it at that time doesn't mean you impair it down where you generate a 15% margin. So the impairment process doesn't throw that big margin. But the bigger thing still is, I mean, demand is still very weak and choppy, and that's still really the biggest factor.

Right. Okay. That makes some sense. Just if I could, otherwise -- well, maybe I'll just get back in the queue.

Okay. Thanks.

Thanks.

Any other questions?

Your next question comes from the line of Joel Locker with FBN Securities.

Hi, guys. Nice quarter.

Thanks, Joel.

Thanks, Joel.

Just wanted to ask about, you mentioned April orders were up or going to be up year-over-year. And with I guess being the last of April, wanted to see what kind of degree. Was it the 76% you saw in March or was it more like low-level digits or something?

Really you're going to have to wait three months to learn the answer to that question.

We really can't comment on that because we're still in the month or so, for -- but the comment is that we do expect April to exceed the prior year. But I can't really give any more color than not at this stage.

Got you. And the gross margins by regions, you usually cover those on the call and didn't hear those.

We really haven't got into that for a couple of quarters, with the environment the way it is. We were just pleased that the pre-impairment margins were 9% in the fourth quarter and 13% this year. But we really don't give any more detail than that in today's environment, Joel.

All right. And then just the last question on, did you have any gain or loss on the land sale at all or was that just kind of flat on the 700,000?

Miniscule.

Just miniscule either way?

Yes.

All right. Thanks a lot, guys.

Thank you very much.

Thank you.

Next question.

Our next question comes from the line of Eric Landry with MorningStar.

All right. Thanks. It's Landry.

Hey, Eric.

I have a question about your Midwest segment. I know that a lot of big boys have left there. Have the people who bought the lots set up shop now and are they functioning pretty much in a steady state rate or are you capturing share during some sort of a vacuum in that segment?

I missed the first part of your question, Eric.

Specifically with regard to Columbus, your biggest city in the Midwest segment, are you capturing share their because of some of the big guys leaving and the guys who bought their lots haven't quite set up shop yet or is there something else going on there?

Well, I think that might be a little bit of it. We got a couple of builders enter this market and they have had their shop set up now for a good six, eight months. So we have a very strong reputation in this market. And under the circumstances, when there's just a very finite buyer pool out there, I think our reputation and our product and our marketing is winning. That's what I think it is.

In other markets where we don't have maybe that kind of dominance, I can't make the same statement. I wish I could. But in Columbus, I think we're, you know, our market share is probably slightly in excess of 30% today, whereas, for the better part of the last 10 years, it hovered between maybe 22% and 24%.

Yes. I do believe too that Columbus has under shot jobs there, as silly as that sounds, for quite awhile now. Your absorptions are the highest they've been in two years in all your segments. I think there's something going on.

We've been working very hard on trying to get absorption levels up and so forth.

Right.

So I appreciate it.

Most of our communities are on target in terms of our internal absorption targets. So I do appreciate that as well.

Yes. Last thing. When you talk to your buyers, are they mentioning that the tax credit is a big component of their decision? Or what's the feeling out there with regards to why people now seem to be getting off the fence?

Well, Paul, you go ahead and answer that.

While I don't think that the tax credit is responsible for large volume of sales, I think all customers who come in do ask about it and do pay attention to it and it's really just one more tool in the sales process. But it certainly is having a positive influence on sales.

It could have been a lot more of an influence had the government done a little bit more. We have to get that out, as you know.

I guess I'm just trying to figure out whether or not this is a transitory bump and once this goes away, and we're back in the doldrums again is what I'm trying to figure out here.

Everyone's trying to figure that out. Once you get that figured out, just let everyone else on the call know.

All right. Thanks. I'll be eagerly watching for next quarter. Take care.

Thank you very much.

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

Thanks. Good afternoon, guys.

Hey, Jim.

Hey, Jim.

How are you?

I'm doing just fine.

Good talking to you.

Yes. Good quarter. So I've asked, could you give maybe a little detail, like talk about the new land deals and maybe the ones you mentioned in Raleigh and Chicago, kind of what kind of lot prices relative to maybe what was in there, and the cost basis on the deal or anything else you can give us, kind of color how good of deals these are?

Well, let me say this, and then I'll see if Phil wants to add anything. The Chicago deal with a fairly sizable deal that we had originally been speaking to Kimball Hill about. Then when they went into bankruptcy, we actually made the deal in bankruptcy with them. And we thought we got it for a pretty darn good price and it looks like that's the case thus far, because we're getting really good activity at very profitable margins.

The other deal was a Raleigh deal and just I don't think I'll say anything more than it was with another big public builder and we thought we got a pretty good price there.

What we're seeing mostly in the marketplace, Jim, is it tends to be bulk lot transactions, they tend to be 25 or 50 lots, and that's kind of what these deals were. And we thought, based on their price point and the demand in that area, we thought we could do a fair amount of volume in there. Obviously, we're trying to do at least two a month. And in both these communities, we've done well in excess of that. But they have been finished lot, kind of small, bulk deals, and they've both been very, very good deals for us so far.

And then I was wondering on the new smaller product you've rolled out, is that -- I'm sure you're not doing it in every community across all your regions. But what percentage, more or less?

Right. Let me tell you what we've done. We've introduced it in Columbus in about 10 communities. We're going to have models for the very first time coming out of the ground in about 10 days. So right now we're just selling them off of paper. But the initial interest appears to be pretty good. In fact, quite good, given that people can't see anything but a drawing.

Ultimately, we will also be rolling this out during the course of the next six to 12 months in most of our -- in Columbus -- not just Columbus, but in Cincinnati and also in Indianapolis and selectively in Raleigh and hopefully Charlotte as well. We have another series, a new series that we've introduced down in Tampa and Orlando that we're going to look to try to incorporate some of the elements of these -- of this eco-series into the new series that we've got in Florida. It's not quite as efficiently designed and we're going to try to incorporate some of these features into the Florida stuff.

So long answer to your question. But right now just Columbus, ultimately, most of the rest of the Midwest. It's 40-foot wide product. It works on conventional 50-foot wide lots. The garage is pulled back from the front of the house so it satisfies most of the zoning authorities from an aesthetic standpoint, and we're excited about it.

Okay. Great. And then final question. So 13%, I was trying to calculate. I didn't get quite that high. But 13% gross margins, I guess pre-impairment in the quarter. Phil, can you comment in backlog -- that your backlog unit-wise is actually up. But are the margins similar, maybe a little better than that as you look at backlog?

That's not something that we really have been getting into with the market conditions and so forth. We do think that we are making progress in that area, but not really making any specific comments on what the backlog's at.

In the last couple years, the -- I don't know what the right word I want to use is. I was going to say integrity -- the reliability, maybe, or the certainty of the backlog closing at the stated contract price, or, for that matter even closing, as you know, that's all been in somewhat of a crazy situation across the whole industry, when people are either, A, not showing up for closing, or B, renegotiating at the closing table. And so I don't think it would be in our best interest to get into that.

And another issue they, of course, is our spec sales. We did drive our specs down a significant amount in the first quarter. But as those specs sell and close, those margins also impact what we have. So we're working very hard on improving margins, getting to breakeven and making money and that's what we're focused on.

Okay. All right. Thanks.

Thank you, [Jim].

Your next question comes from the line of David Frank with [Columita, Winger, & Bett] Management.

Hello.

Hey, David.

Couple questions. If we could drill down just a little bit more into what's driving the upsurge in demand. I mean, is there a little bit of a profile of the buyer that you could give us in the home? Are we -- it sounds like we're talking about the homes that are, let's say under $200,000 that are selling to first-time homebuyers. Is that really what's driving the demand?

We're definitely doing more business with the first-time buyers than before.

Or maybe stated another way, the buyer that doesn't have a house to sell.

Okay.

Which may or may not be a first timer, or it could be a -- they may have sold their house. I mean, we're seeing listings drop in most of our markets. Now some of that's just listings being pulled. But houses are starting to sell.

And are there any location reasons why certain things are selling more than others? I mean in terms of where they're located in particular metro areas.

I mean were definitely in the subdivision business and we have reduced our communities by 20% in the last year. We've tried to get through the location as best we can, our marginal locations. We did by $11 million of land the first quarter. So we're trying to buy properties where the demand is there and there's not as much competition. You can also see from the reduction of our sales prices, I mean, if you look at our backlog average sale price, it was what, almost $300,000 a year ago, and now it's 230.

Right.

So we have been aggressive somewhat from a price standpoint trying to drive some volume, trying to work through 4,000 finished lots and generate cash. So we've been working on a lot of those things. And we've talked about product. We've talked about sales training. We've talked about marketing. We try to do a lot of different things and it takes those things, these days, to sell houses. You have to give customers a reason.

And right now, the bucket of buyers that's sort of absent from our backlog pool, which, therefore, also brings down the average selling price, is that first or second move up buyer, that buyer that's got that house to sell that's still sitting on the sidelines for all the reasons that we've read about and continue to read about. And when that buyer begins to come back in earnest, we're likely to see some, I think, average sale price appreciation. I think that you just got a lot of forces bringing it down right now, some of which you touched on.

Okay. Thanks. One last question here. The preferred equity, my understanding is you only have, what is it, six quarters to defer the payments on that before the two board members would be appointed by the preferred equity holders?

Yes, they do have the right to after six dividends are missed to have two advisory type board seats.

Have you given any public statement as to what your plan is in terms of the preferred dividend or your long-term plan to keep or pay off that --

No. No, we have not.

No, we have not.

Okay. Thank you very much.

Thank you. Next question.

Next question comes from the line of Jennifer [McCann] from Principal Global Investors.

Hi, guys. I just have a question about your cash balance. It looks like, and correct me if I'm wrong, that net of the tax refund, you are actually a user of cash during the quarter. Is that correct?

I'll leave that to the accountants to answer. I'll let Ann Marie handle that.

I mean, in net -- cash flow from operations was positive.

Right. Right.

Net of the tax refund we were slightly negative overall.

Okay. And can you tell me whether or not that's coming from your land spend during the quarter or some other financing activity that was done?

Well, if you look at the big items in the quarter, I mean, we ended last year with $33 million. We ended the first quarter with $65 million. We got a $36 million cash tax refund. We spent $11 million on land.

For a development.

We also got in from our plane proceeds, we got in $8 million from the plane proceeds.

Paid off nine.

And we paid off the plane's debt, which was nine. So those were kind of the big numbers that went through there.

Okay.

But then you've got to sort through the other balance sheet items, accruals, and payables and all those type things. But those were the big items.

Okay. And just to be clear, when you're talking about the mortgage facility, I missed a little bit there. There was a lot of good information. I just want to make sure I got it. There was the $20.4 million formerly drawn on that facility and now it's down to zero?

Yes.

That's correct.

As of today.

As of today.

What happens on that mortgage facility in general is there's outstandings at the end of the month when the majority of the customers close. We don't originate any loans unless we have a home for it with an investor. And in general, that mortgage facility usually gets to zero during the middle of the month anyway for a few days. So again, all we did, we actually just redid the facility with a different lender.

Okay. So there was no cash movement on that? Or was there --

No.

-- cash movement?

No. We just substituted one lender for another.

Okay. All right. Great. That's all I have. Thanks.

Thank you.

No problem.

The next question comes from the line of Joshua Pollard with Goldman Sachs.

Good afternoon, gentlemen. My question is on land deals. Most builders are selling a little bit of land and buying a little bit of land. In addition, every builder's suggesting that they're selectively selling A and B land but selling C and D land. My question is, who's buying the C and D land? And maybe even more specific to MHO, you guys sold a couple hundred thousand dollars worth of land. And I'm just wondering what didn't you like about that land and what did the person who was buying it from you like about it?

Well, let me make one statement, Josh, and then I'll turn it over to Phil. Back at the end of '07, and I know you're focused on this quarter but I just want to get this out first to give some context.

That's great.

Back at the end -- in the end of '07, we had what was arguably the largest bulk land sale of any homebuilder in the country. We sold nearly 4,000 lots, which, relative to our size, was quite significant, in 13 different transactions in the fourth quarter of '07. And I think we, at the time, I think we were fortunate that we sort of got out ahead of the curve. It's very difficult to sell land right now for the reasons, some of the reasons that you're mentioning. I mean, the stuff that's for sale is not the good stuff and the good stuff's likely overpriced anyway. So the things that are being peddled by builders have to be deeply, deeply discounted. And then whose going to buy them and hold them, because some of these pieces, there's pieces that are for sale out there that have no value because the cost of development exceeds their current market value. So it's a very -- I'm talking generally, not in our case, but there are builders trying to sell pieces that have no value.

And when you look through your land situation, sometimes it's a piece of land that maybe it's in a part of town that you don't feel real good about, maybe the competitive environment around you is not where you want to be. As far as our land sales, we have done very, very few transactions with any type of funds that are buying land. We've sold land to apartment people. We've sold land to investors. We've sold land back to people that we bought it from. So it's come from different sources and that's what you have to go through.

Got it. Thank you very much for that color. My next question is on pricing. I'm really trying to understand what supporting pricing and in MSAs like Cincinnati and Columbus where the economic picture doesn't seem to be quite as good as places like DC where it's a bit easier to explain. Are you suggesting with your product, that M/I Homes is getting price and others aren't in markets like that? Or is there something going on in those markets specifically?

Well, there is still a certain amount of core demand in those markets. There's still household formations. There's still things happening. When you look at markets like Cincinnati, even though the permits may be off in the fourth quarter, that market may have been down 20%, 25% from a permit standpoint, but there's still a certain amount of homes being sold and you have to make sure that you're in the better school systems, near the better transportation, near the better shopping. You know, we try to make sure that we have our communities located in the desirable areas with a product that they want to buy. So that's what you have to do. There's still some demand out there.

Okay. Great. My last question is on your strategy. I'm just wondering, what are the stats? What do you need to see out of the economy or out of your specific MSAs to change from your defensive strategy now to a strategy that looks to grow?

Terrific question. Historically the single most important metric that influences the strength of any particular market's housing has been job growth. And I think the conventional wisdom is that we need to see maybe not so much job growth, but a slowdown in the growth of unemployment as a sign that things are starting to get better. Housing, the comeback of housing, the bottoming of the housing market, once that does occur, and we may be in it right now, we don't know that, it may help trigger the creation of job growth as a result of homes being purchased and homes being built.

But I think if we had to hang our hat on anything, and to a certain extent it's like that old line, you know it when you see it, I think it would be -- it would be just trends that suggest that job growth is turning in the right direction. And I think secondarily, if we had to look at any one particular metric in a market, it would probably be the pace at which existing home sales, or the listings of existing homes are beginning to get back to more normalized levels and also taking a look at how -- you know days on the market and so forth. And then the final one would just be, and I think we may be getting close to this, but no one knows for sure, would be falling home prices becoming a thing of the past. Falling home prices is just right now the chilling -- sort of the real chiller.

So I guess in order it would be those three things for me.

I really do appreciate that color. Let me explore just this issue with another question. You think about any industry that -- or just let's think about home building specifically, there's low barriers to entry in this business, the most precious things at this stage of the game are capital and expertise of builders like M/I Homes. What the key would be to try and increase your long-term returns on capital by getting in just a bit early. Do you not see any benefit in not? Do not see any benefit in that when you think about where your balance sheet strength is right now?

Well, when you say as far as getting in early, I mean we feel good about the nine markets we're in. We do have 4,000 finished lots. We think we're positioned pretty well. Where we see small opportunities like we did in Raleigh and Charlotte --

Raleigh and Chicago.

-- Raleigh and Chicago, we take advantage of those.

And we've seen some in Cincinnati.

And we think our balance sheet's in pretty good shape. But again, as Bob said, until we see some more consistent strong signs, we don't want to ratchet things up too much.

Got it. Great. I really appreciate the color.

Thanks. Next question.

We have a follow-up from the line of Alex Baron with Agency Trading Group.

Yes. Thank you. I wanted to make sure I got these numbers correct, Phil. You gave some numbers on a lot count and the investment in the lots.

Yes.

I think I heard you say 3,500 finished lots at a value of $170 million. Is that correct?

Yes. At March 31, '09, we had $67 million of raw land, $77 million of land under development, and $170 million of finished, unsold lots, which is about 3,500 finished, unsold lots.

Okay. And what's the lot count for the other two categories, the lots under development and the undeveloped lots?

You would just take the 7,700 less the 3,500. That would be about 4,200. And that's divided between raw and under development.

Okay. But the bulk is undeveloped?

Didn't say that. We don't really break that out, Alex.

Okay. All right. Great. Thank you.

No problem.

Your next question comes from the line of [Anthony] Jones with Wasserman and Associates.

Hello, Phil.

Hey, Tim.

How are you?

Great.

What are your -- I'm sorry, but I came on real late and this is my fault, not yours. Can you give me when your loan payments are due for the next three years, this year, next year, and the year after?

Tim, you came on so late, you missed all of our good points.

Oh, well, then let me add to the -- I'm sorry. But I'll try to take an order.

Tim, as far as from a debt standpoint, our senior notes, which are $200 million, they mature in March of 2012.

Yes.

Bank debt, there is a zero outstanding. It matures in October of '10. So the debt is just the senior notes in March of 2012.

And nothing else in 2013 or anything?

A very small amount. We have like a $6 million note.

No, that's not big debt.

Yes, nothing big, Tim.

Well, that's -- now, in what did you get -- I'm sorry. What did you get for the tax refund?

What was the question? I couldn't understand --

What did you get from the tax refund?

$36 million with three more to come.

Okay, 36. I was wondering -- okay. And you said one you had 4,000 finished lots and then you said to Alex Baron's question you had 3,500.

Yes. I was rounding. It's 3,500, Tim.

Oh, okay, there are 3,500. And what is the dollar value of that?

$170 million.

Okay. And what did you do? Did you go into how much you could sell to generate positives that are in excess of what you need right now that you could generate positive cash flow with?

Did not get into that. Obviously, one of our big priorities are to work through these 3,500 lots because we've already spent the hundred $170 million. That's what we're focused on first and foremost. But we are buying some other land. We are developing a little bit of land. But we obviously, first priority, is to try to get through those finished, unsold lots.

Lastly, can you tell me, of the land that you're buying, how much of it -- was it the cost of it -- and I know that you're in different markets and so forth, how does it relate to the land that you have written down? Is it roughly equal? Is it 75% of the land or what -- you know, it's probably lower because you wouldn't be buying it otherwise.

Of course, that's a difficult question because that's a location-type situation.

I understand.

I would answer that in general on things we bought, it's probably 10% to 20% below what we might have somewhat in that area.

Tim, the biggest deal we did within Chicago. And as a brand new builder there, the good news was we didn't have anything to compare it to that would've been 30% higher. Then my guess is, if we had, it would have been 30% higher.

It's just a hard question, Tim, because it depends on the location. And a lot of times we're buying pieces that we don't really have anything close to that, so it's hard to do comparables.

How could you get something 30% below what -- the market when there are plenty of builders I can name that are in Chicago?

Well, the deal we did in Chicago we bought from Kimball Hill in bankruptcy and we got it for we think a pretty fair price.

I guess you did. Good job. Thank you.

Thanks now.

Thank you.

Phil, there's no further questions at this time.

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