M/I Homes Inc (MHO) 2009 Q2 法說會逐字稿

Good afternoon. My name is Tasha, and I will be your conference operator today. At this time, I would like to welcome everyone to the M/I Homes second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (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 EVP and Corporate Counsel; 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, I would like to remind everyone that the cautionary language about forward-looking statements contained in today's press release also applies to 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 July 2010.

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

Thanks, Phil, and good afternoon, everyone. As you can see from our press release this morning, we continue to make progress during these challenging times. There are several areas I would like to highlight relative to our second quarter and first half results, a few comments I will make concerning our outlook for the balance of the year. I will then briefly review our markets and then turn things back over to Phil, who will give a more thorough review of our financial results.

First, with respect to our second quarter and first half results, we sold 759 homes during the quarter, which represents a 43% increase over last year's second quarter. This marks our third consecutive quarter of increased year-over-year sales. For the year, our sales are up 32% compared to the first half of last year. Our strong sales were achieved despite a 23% decline in community count from a year ago. We also reported an increase in closings during the quarter, the first time we have seen a quarterly increase in closings since the second quarter of 2006.

And we are also pleased to report that we had another quarter of increase in our units in backlog. Specifically, our backlog at June 30th equaled 1,106 homes, with an aggregate sales value of $260 million, compared to 880 homes with a sales value of $254 million at June 30th of 2008.

In looking at our financial results, our gross margins have sequentially increased during each of the past three quarters.

We continue to see positive results from our focus on expense reduction. We have had considerable success in reducing our hard costs, and we continue to work this very diligently. And our SG&A declined 22% from prior year levels. The combination of all these factors resulted in our operating loss declining by 24% from the first quarter of 2009.

While we are certainly pleased to see our loss narrowing, we're obviously not where we need to be or where we want to be, but we are getting closer to breakeven. And once we achieve breakeven, we will begin to move back to profitability. We are intensely focused on returning to profitability as soon as possible.

During the past six months we have also made considerable progress in adjusting our product offering and strengthening our line of affordable homes. Specifically, several months ago we successfully launched our eco series, a new line of homes specifically designed to appeal to first-time home buyers and others interested in a more efficient, economical, and environmentally-friendly lifestyle. We are currently selling our eco series in several of our Columbus and Cincinnati communities. Initial market reaction has been quite strong, and we are very excited about our plans to offer the eco series in most of our other markets by year end.

During the quarter we also took steps to strengthen our balance sheet. As previously announced, we completed a public stock offering in May, raising $53 million of equity. We ended the quarter with over $100 million of cash, zero bank borrowings, and no debt maturing until 2012. At quarter's end our net debt-to-capital ratio equaled 21%, which is one of the lowest levels in the home building industry.

Now to just briefly review our markets. First, the Midwest region. The Midwest housing markets continue to be challenging. However, we have begun seeing some positive trends. As mentioned, our eco series was introduced in our Columbus and Cincinnati markets and is clearly making a positive impact. We have also entered -- we have recently entered the Northern Kentucky market and are having some success there as well. In the Midwest region new contracts were up 65% during the quarter when compared to the second quarter of 2008. This has exceeded our expectations, and we are gaining market share in most of our Midwest markets. At June 30th, 2009, we owned 4,800 lots in the Midwest versus 6,000 a year ago.

The Florida region. Market conditions in Florida continue to be quite challenging in both Tampa and Orlando. New contracts and homes delivered for the quarter were down nearly 20% and 15% respectively when compared to the same period of last year. At June 30th, we owned approximately 1,700 lots in Florida versus 3,500 lots a year ago, roughly a 50% decrease.

Finally, the Mid-Atlantic region. Our new contracts for theMid-Atlantic region were up over 65% for the quarter and our homes delivered increased approximately 25% when compared to the same period of 2008. At quarter's end we owned approximately 1,200 lots in the mid-Atlantic region versus 1,800 a year ago, or roughly a one-third decrease.

General market conditions continue to be challenging in both Charlotte and Raleigh. However, we believe we're making progress with both our locations and our product. And it seems to us as if the DC market is improving slightly. We believe that our market share in both Raleigh and DC is on the rise.

Finally, in closing, as we look ahead we are eager to work toward profitability, as I said, as we build on the momentum generated during the first half of this year. At the same time, it is clear to us that economic conditions remain difficult and are clearly unpredictable. We, therefore, will continue to maintain a primarily defensive and conservative operating strategy as we move ahead.

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

Thanks, Bob. New contracts for the quarter increased 43%, to 759. This equates to 2.2 per community per month for the quarter versus 1.2 a year ago and 1.8 last quarter. Our cancellation rate for the quarter was 16%, down from 22% in the second quarter of '08. Our traffic for the quarter increased 3%.

Our sales were up 37% in April, while traffic was down 9%; our sales were up 58% in May and traffic was up 15%; and our sales were up 36% in June, while traffic was down 16%. Our active communities decreased from 138 to 106; and the breakdown by region is 61 in the Midwest, 20 in Florida, and 25 in the Mid-Atlantic.

Homes delivered in the second quarter were 492, up 6% over last year's 466. And we delivered 59% of our backlog this quarter compared to 58% in '08. And our backlog of 1,106 homes is 26% higher than a year ago, plus our backlog average sales price of $235,000 is slightly above March 31's $230,000.

We did not have any third-party land sales in '09's second quarter. This compares to $11 million in '08's second quarter. And our second quarter results include, in cost of sales, $1 million related to the imported drywall issues. We have recorded a total of $5 million in drywall-related charges for homes that we have delivered in our Florida operations.

Turning to impairments, we continue to evaluate our assets each quarter. In the second quarter we recorded pretax charges of $8 million of impairments, consisting of $5 million related to land that we own, $1 million related to write-offs of deposits and preacquisition costs for land and lot deals we no longer intend to pursue, and $2 million related to our investment in joint ventures.

The second quarter impairments represented approximately 700 lots in 14 communities with 26% of the impairments in the Midwest, 49% in Florida, and 25% in the Mid-Atlantic region. For the six months ending June 30th, '09, total charges were $19 million, representing $18 million for impairments and $1 million for write-off of deposits and preacquisition costs.

We have impaired 75, or 71%, of our active communities, and approximately $14 million of previous impairments reversed into housing gross margins in the second quarter of '09. It is possible, depending on market conditions, that we will incur additional impairment charges in the future. And our gross margins, exclusive of the impact of impairment and drywall charges, were 14% for the quarter, compared to 13% in '09's first quarter.

G&A expenses for the quarter were $16.4 million, which included $3 million for land option write-offs, severance, et cetera. Adjusted G&A for the quarter was $13.4 million. Year-to-date G&A expenses decreased $6.3 million when compared to the prior year. And selling expenses for the quarter decreased $3.5 million. Adjusted SG&A totaled $26 million, or 19.8% of revenue.

We continue to very closely monitor our expenses. We currently employ about 500 people, which is down about 25% from a year ago. Interest expense decreased $300,000 for the second quarter, and $1.5 million for the first six months of '09, compared to last year. The decrease in the second quarter was primarily due to a decline of $700,000 in net interest incurred to $3.7 million, which is a direct result in the reduction of our weighted average borrowings from $251 million last year to $211 million this year. This is partially offset by an increase in our quarterly weighted average borrowing rate of 8.4%, compared to 7.7% a year ago.

We've got a $9 million loss from operations for the quarter compared to $12 million in the first quarter. We are focusing daily on reducing our operating loss and returning to profitability. We have $25 million in capitalized interest on our balance sheet as of June 30th, '09, compared to $28 million a year ago, which is about 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 noncash, after-tax charge of $7.6 million for the second quarter for a valuation allowance related to our deferred tax assets as required by FAS 109. At June 30th, '09, our gross deferred tax asset is $128 million, which is fully reserved. We do not expect to record any additional tax benefits until we return to profitability.

Now I will turn the call over to Paul Rosen to address our mortgage company results.

Thank you, Phil. Mortgage and title operations pretax income increased from $1 million in 2008's second quarter to $1.4 million in the same period of 2009. This is the first increase in four quarters. The change was partly the result of a 12% increase in loans originated, from 382 in 2008 to 426 in 2009. Additionally, we recognized higher servicing release premiums due to the change in product mix. Loan-to-value ratio on our first mortgages for the second quarter was 89% in 2009, compared to 85% in 2008's second quarter.

For the quarter we experienced a significant change in product mix. Our home buyers predominantly chose FHA/VA financing over conventional. 60% of the loans closed were FHA/VA and 40% were conventional. This compares to 34% and 66% respectively for 2008, the same period. Over 80% of our communities are now eligible for FHA financing.

Overall, our average total mortgage amount was $213,000 in 2009's second quarter, compared to $230,000 in 2008. The average borrower credit score on mortgages originated by M/I Financial was 723 in the second quarter of 2009, compared to 718 in 2009's first quarter. These scores compared to 716 in 2008's second quarter and 707 in 2008's first quarter.

We sell our mortgages, along with their servicing rights, to a number of secondary market investors. Our main investors in the second quarter were Wells Fargo and Bank of America. We have not repurchased any mortgages this year. Our mortgage operation captured about 88% of our business in the second quarter, compared to 2008's 85%. At June 30th, 2009, M/I Financial had $19.5 million outstanding under the M/I Financial credit agreement. As mentioned in our prior conference call, we have a new secured credit agreement that provides up to $20 million secured mortgage warehouse line.

Mortgage lending continues to experience a great deal of volatility in the underwriting requirements applied to our customers and our homes. Credit score requirements are increasing and many borrowers are subject to greater down payment requirements as compared to previous years. New restrictions on appraisals in condominium financing have created more barriers for our borrowers. Additional restrictions in the private mortgage insurance industry have made conventional financing with less than 20% down extremely difficult. These conditions continue to put downward pressure on home valuations.

In spite of this, our borrowers who are able to comply with the new underwriting requirements are able to obtain FHA and conventional financing at historically low interest rates. Tightening of conditions affect those who could qualify. However, once homeowners can qualify, the financing path is relatively smooth.

I'd like to return the call back to Phil.

Thanks, Paul. As far as the balance sheet, we continually focus on our cash and liquidity. We ended the quarter with $104 million of cash, up from last quarter's $65 million. Our operating cash flow for the quarter reflected funding our growing backlog, which increased by $24 million during the quarter. And during the quarter we completed a public offering of our common shares. The net proceeds from the offering were $53 million.

Total building sites owned and controlled as of June 30th, '09 totaled 9,150 lots, including 750 joint venture lots, 85% of which were owned and 15% of which were controlled, reflecting a reduction of 29% from June 30th, '08 levels. The mix of lots owned and controlled are 62% Midwest, 19% Florida, and 19% Mid-Atlantic. With respect to our lots under contract, we have $1.1 million at risk in deposits, letters of credit, and preacquisition costs at June 30th, '09.

Our total home building inventory at June 30th, '09 was $496 million, a decrease of $202 million below June 30th of '08. And our unsold land investment at June 30th, '09 is $270 million, which is 7,000 lots, compared to $396 million, which was 9,250 lots at June 30th, '08.

Compared to a year ago, raw land decreased 21%, land under development decreased 24%, and finished, unsold lots decreased 39%. At June 30th, '09, we had $67 million of raw land, $64 million of land under development, and $139 million of finished, unsold lots. And the $139 million of finished, unsold lots represents 2,861 lots.

We constantly focus on getting our finished lots through our systems to generate cash. The market breakdown of our $270 million of unsold land is $135 million in the Midwest, $50 million in Florida, and $85 million in the Mid-Atlantic region. In the second quarter, we purchased $4 million of land and have purchased $14 million of land this year. As to land development expenditures, we spent $4 million in the second quarter and have spent $8 million for the year.

At June 30th, '09, we had $7 million invested in joint ventures, down from $26 million a year ago. These JVs 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 venture we are 50/50 partners with a large public builder that has a loan with a loan-to-value maintenance ratio, and this venture has debt of $11 million.

At the end of the quarter we had $41 million invested in specs, 92 of which were completed, and 321 specs in various stages of construction. This translates into about four specs per community. And of the 413 total specs, 209 are in the Midwest, 118 are in Florida, and 86 are in the Mid-Atlantic. At June 30th, '08, we had 580 specs with an investment of $93 million.

At June 30th, '09, we had no borrowings under our $150 million credit facility. The facility maturity date is October 2010. Our borrowing availability is currently $65 million, less the outstanding letters of credit, which leaves us with availability of $41 million. And this availability can increase as we secure assets. In addition to our credit facility, we closed recently on a letter of credit facility, which adds $35 million of availability. This gives us additional financial flexibility.

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

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

Good afternoon. Well, good quarter, guys. I mean, you're the only company I think that can say they had three quarters of consecutive order improvements, so -- and very strong orders. We were wondering if you can help us with the strength of your business in Cinci and Columbus. Clearly, as you're gaining share, are you finding that competition has -- obviously funding or lack of funding is a big problem for competition, public's exiting markets, or is it that you're better at retooling the product and maybe offering the best value? Your price -- ASP is still in the twos, so it's not like you're selling $150,000 houses, or maybe you are, but a little more help to get to how your performance is so great from respect to orders. First question.

First of all, Ivy, how are you? It's good to hear from you. And thanks for your comments. That's a great question. And very honestly, we've asked ourselves internally why are our sales--because it's been (technical difficulty). We've asked ourselves internally why have our sales been as strong as they've been for the last six to eight months, seven months or so. And I think there's a lot of reasons for it.

I think as it relates to Columbus and Cincinnati, clearly there is less competition. Your report shows nationally how many builders have, unfortunately, closed their doors, and there's a little bit less competition in every market right now. But I think that -- I think our product is getting closer to where it needs to be in terms of where the world is today versus where it was before. I'd like to think we have a number of very strong communities, which may not be A's by any means because we're not making money yet, but they certainly were very strong in the good times. And even though times are really rough now, I think that they're still selling at pretty decent paces. I think our marketing has been strong. I think some of our promotions, particularly some of our financing promotions have stood tall and have helped gain or garner traffic and, as a result, produce sales.

We have spent a lot of--a fair amount of money, I should say, in investing in the strength and training of our sales force and continue to. I think that that's making a difference. I think we've got the best sales leadership. We've made a lot of changes in our company, in our sales leadership in the last year. It's almost completely turned over, and we're seeing not just energy--or energetic leadership, but effective leadership.

And I think our use of the internet as a selling tooling -- I'm not going to hold us out as the poster child, but I think we're getting better at it all the time and seeing good results from that. I wish I could give you the one reason I think it's a whole lot of --.

No, that's helpful. No, I think that your--.

I think there's a whole lot of things and we -- relative to the market we've had strong sales in DC, certainly Columbus and Cincinnati, and our business in Raleigh, frankly, has been quite good, we think, relative to the market. We're gaining market share there as well. But those --.

Are you below the market in terms of price? Because your gross margin is still obviously trending at only 15% today, would suggest that you're doing even better than some of the large nationals that are closer to the -- or were at like a 10% to 12%. So I'm trying to understand if there's something from a competitive standpoint in addition to better quality product; like you're saying, retooling, a better sales force. Where are you priced relative to the competition, do you think, for the particular size of the home you're selling in the markets you're doing so well?

Well, Ivy, as you know, we really look at it, first and foremost, as a subdivision business and we stay very focused on our locations. We try to understand where the demand is coming from from a buyer's standpoint. We try to understand what those income levels are. We try to also understand what competition is around us. And also we try to be very willing to deal with the market conditions, moving prices as we can a little up or down. So I think, as Bob said, it's a lot of different things.

Right now you really need to give buyers a reason to buy, and we're trying to do that in a lot of different ways; product, sales reps, et cetera. A lot of things go into that. But you just have to stay on top of your subdivisions, all of them, all the time.

Okay. One more question and I'll let others ask and then I can come back. But we've seen a tremendous amount of momentum in the really March, April, May, and into June time frame that, based on your numbers, seem to moderate slightly in June. Are you concerned that we've pulled forward demand given the tax credits and a lot of the benefits from moratoriums on foreclosures that were in place and historic mortgage rates?

Do you feel like the market is poised for a bit of a pull -- a slowdown and demand may wane; or do you feel like the traffic, even though it was down 16% in June, that there's enough demand that you can sustain the sort of year-over-year momentum that you reported in 2Q?

That's a good question. First of all, there is seasonality to selling, even when there isn't a so-called spring selling season. I think the first half of the year is typically stronger than the second half; at least it has been for as long as I've been paying attention to it. So I think that there's a certain amount of diminished sales pace that you start to see through the late summer; and then, of course, November and December typically aren't great months.

I think that the $8,000 tax credit has helped. As you know, we, and I think virtually every other builder in the country, does not believe it's enough. Whether and if it goes away -- at this point it looks like it's going to, but maybe it will be extended, we'll see. We'll just have to see.

I mean, I think like -- it's very unpredictable in terms of the economy. Conditions are still tough. There's still a lot of, I think, bleak news. We would like to think that things are not getting worse, so maybe that is a form of getting better. I just think it's very, very hard to predict, which is why we're not providing any guidance, as much as we would like to.

Okay. Thanks, Bob. Thanks, Phil.

Thank you.

Thanks, Ivy.

Your next question comes from the line of Eric Landry with Morningstar.

All right. Thanks. Impressive work, you guys. You ought to be proud of yourselves.

Thank you.

I think, Paul, you mentioned some people having difficulty in getting a conventional mortgage with 20% down. Are you thinking -- is it more difficult now to get a mortgage than it has been in recent quarters?

I said with less than 20% down.

Okay.

And in certain areas there is a tightening in the mortgage insurance industry, in most areas, that is causing the underwriting of loans to continue to be pretty conservative, to not only satisfy the investors who buy the loans, but the mortgage insurers as well. So I think we're paying a tremendous amount of attention to these deals. And yes, the underwriting is a little tighter on the conventional side.

It has gotten tighter sequentially is what you're seeing?

Yes, it has.

Okay. That's not good news.

The next thing. Bob, I noticed your options were up 50%, which indicates you're doing more activity in the land market. What's the competition look like these days?

Well, when you start looking at options or whatever, I mean the numbers have not been real big. I think what you're saying is that from a land standpoint we owned 7,700 lots at June 30th, and we had under contract another 1,400?

Yes.

A year ago we owned 11,300 and had under option 1,500. So it --

Right. Sequentially they're up from 950 to 1,400.

950 to 1400. We only bought, like we said, about $4 million of land in the second quarter. We're very, very mindful of the difficult market conditions. We are looking at a number of land opportunities.

And they're very select. I mean, we've done a deal in Raleigh and a deal or two in Indianapolis, a couple of deals in Cincinnati, a deal in Columbus, we're looking at some stuff in Charlotte.

The hurdle rates are stiff. And there are some instances -- for example, one of our best communities in the entire company is a community in Chicago that we acquired within the last nine months that we bought out of bankruptcy at, we think, a pretty good price. And we've had very strong sales pace at very profitable margins.

But It's -- there's no way that one could rationally conclude that land -- that there's a lot of good land deals out there. They're very few and far between and very, very selective.

When you talk about Chicago, is it Elgin you're talking about?

No, that -- well, actually, that's a deal in Winfield.

Okay. No, I guess the question -- people are -- there's a lot of competition for land in some of the West Coast markets we're hearing, even Phoenix and whatnot. I was wondering if that's the same condition in the markets you're looking at, North Carolina or [Midwest]?

Yes, maybe -- the deals that are being peddled at 20% to 40% discounts, if they were -- depending upon the reasons were they're being peddled, there will be a few -- you won't be the only one at the trough.

Okay. Thanks.

Okay. Thanks. Appreciate your comments.

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

Hi. Good afternoon, guys.

Hey, Jim.

Hey, Jim.

I was wondering if the first one -- going back to the comments and thoughts on breaking even. And I know there's loads of moving parts, but the biggest one under your control is your G&A expenses and obviously, to some degree, your cost of sales. Any feeling or gut based on if current sales trends held steady, can you get to profitability in '10 sometime or is there any way to kind of handicap it or what you think about it?

Jim, right now, as Bob said, projections are very, very difficult. We're focused every day on reducing our losses and getting back to profitability. And as you stated correctly, there is a lot of moving parts.

We have a fair amount of good news. Our average sales price in backlog is up 6/30 to 331, which was the first time we went up in ten quarters. Our margins did move up 100 basis points. We have reduced our expenses significantly from a year ago. And our backlog is up as of 6/30 compared to a year ago. So we are making progress, and we need to continue doing that.

Obviously we need more volume. We need our sales prices to not go down as they have the last few quarters. We're working very much on improving margins, and we're also very mindful of our costs. So we can't give any projections publicly as far as that, but again that's something we're working on every day.

We just completed our revised budgets for the second half. Also took a very hard look at 2010. So other than cash and liquidity, profitability is right there with those things.

The other one I was just looking at is your comments on sales per community per month. And if I'm just taking the numbers you provided, it looks like the Mid-Atlantic for the quarter kind of ran a little over three sales a month, in Florida a little under two, and the Midwest a little above two. Is that about right? And the Mid-Atlantic looks pretty good. Do you think there's some legitimate opportunity for the Midwest pace to get even better, or anywhere near where the Mid-Atlantic is right now?

These are all good questions, Jim. I think the DC market is probably the strongest market that we're in right now. Again, none of them are really very good, but the DC market I think has a little bit more strength, a little bit, maybe just a wee bit of pricing power, and a little bit more demand than the other markets.

Right now our target is two sales per community per month. That's our internal target. And given the current conditions that we're operating in, if we can continue that for the foreseeable future I think everything else will be just fine.

And that's a two minimum. Obviously we'd like to have more than that, but two per month per community minimum.

So far this year we've been able to beat that. And it remains to be seen whether we can continue it. But I know one thing, we're going to continue doing what we've been doing and see to it that we give every effort towards it. If we do, I think that all of our other numbers will, at least in time, fall into place very nicely.

Okay. Very good. Thanks. And good job.

Thank you, Jim.

Thank you, Jim.

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

Hi, guys. Nice job on orders this quarter. Just wanted to say that. And on your community count, do you expect that to drop any further? I guess it took another southbound from 119 to 106 sequentially, and I was wondering if you -- I mean do you see it ever going below 100 or is it going to stabilize or go higher by year end?

Joel, we're trying to stay out of that projection business. Although, I will tell you I would not see it going down very much. We're looking at more right now maybe at the 110 or so level at the end of the year. Obviously there's some being dropped off.

Right.

We are looking at a lot of land opportunities, as Bob said, being very careful at what we buy. But no, I would think it would go up a little bit.

Right. And is there any -- I know your covenants against buying back your bonds in the open market, but is there any way that you can lift those by getting to a certain leverage ratio?

As far as buying back the $200 million of senior notes?

Correct.

Right now that's not something that we're seriously considering right now. Those bonds have recently traded in the 80 range. Again, we always look at those type things, but right now we're really focused a little more on cash, liquidity, and getting back to profitability.

Right. All right. Thanks a lot.

Thanks.

Thank you.

Your next question comes from the line of Eric Landry with Morningstar.

Thanks for taking my second question here. What does the stock offering do to your restricted payments basket?

Well, from the restricted payments basket, it obviously did increase that. But if you look at the 630 number round figures, that basket is still negative by about $150 million.

Okay. That's what I thought. So could you maybe give some thoughts around what's the rationale for doing the stock offering at less than what was booked back then?

As we stated at the time, we thought from a liquidity standpoint, continuing to strengthen our financial condition. As Bob has stated, the outlook is difficult to predict. So we thought from a safety flexibility standpoint, having the opportunity to put $50 million-plus of long-term capital in our company was an overall good transaction.

Obviously the price is never exactly where you want it. And also we sold a fair amount of the stock. But there are certain things that you do because you think it's the best transaction for the company. We think we can put that money over time to very, very good use to get our company back to profitability and grow the business. So overall we are very pleased with the transaction.

So nothing is slated for it right now? It was mostly a defensive move?

I think it was in part defensive, as Phil said. But as and when the markets begin to improve, and in some cases that may ever so slowly be happening as we speak, who knows, but as we begin to see land deals that make sense, that meet hurdle rates and that pencil out, there aren't going to be many of them, but there's going to be some, we want to be able to at least sit at the table as much as possible. So in that respect it's not defensive. It's certainly a defensive component but also one that's offensive.

Okay. Thanks. By the way, I think there's going to be more competition at that table than most think. I think it's starting to play out that way, at least some of the West Coast markets. But thank you very much. Take care.

Thank you.

Your next question comes from the line of Lee Brandon with Wells Fargo.

Hi, guys.

Hi.

Hey, Lee.

You guys have done a good job of bringing down your debt position over the last couple of quarters. And I know you don't want to speak to forecasts or give any details quantitatively, but I was wondering if just directionally in the second half; because Q1, a lot of that was driven obviously by your tax refund, and Q2 by the equity offering. And assuming you're not having those type of events in the second half of the year, should you -- should we still look for you guys being able to generate--be positive from a free cash flow standpoint in the second half?

Lee, from a debt standpoint what we have left basically is the senior notes. We have the mortgage warehouse line and a couple of more small things. So from a debt standpoint we think we're in pretty good shape.

As far as cash flow and so forth, as we said, in the second quarter our backlog, our sold inventory went up and we increased our investment there about $24 million in the second quarter.

From a spec standpoint, our spec investment actually came down a little bit. You would surmise with our backlog being higher, our closings should be higher. Of course, you never know from cancellation rates and those type of things. But on the other hand, if our backlog keeps on growing, hopefully that will take some dollars. We have not changed our strategy of having specs three per four per community.

So again, when you work through all that, not giving any guidance, we're focused very, very much on cash flow and having good liquidity. And we think we're in pretty good shape now. But again, we continue to stay focused on that very much.

That makes sense. Typically it's easier the second half than the first half.

Well, normally you get into some seasonality at the end of the year because obviously the building period in a number of our markets you get into winter -- December, January, and February -- so oftentimes your field inventory is not as high. And in general in our business, year-end closings tend to be a little higher.

So, again, depending how that seasonality washesthrough, that obviously affects our quarter-end cash balances.

Yes. And then on the--just on the buyer, what are you seeing from a -- is there any, I don't know,how you can say it, typical buyer? And where I'm kind of getting at, is there any risk to the buyers that you're seeing out there as we look forward? I know that in past years it seemed to be investors and we've heard about that. It doesn't seem to be that at this point. But I was kind of curious to any color that you could provide on the type of buyer you're seeing.

Well, like most builders today, new home builders, a much greater percentage of our sales today are to the first-time home buyer who is, at least in theory, the only segment of the buying public that's not at least encumbered with some kind of a house to sell or whatever. So we're selling -- over 50% of our sales for the first six months of this year appear to be to first-time home buyers.

We've already, though -- I mean the biggest risk that we're dealing with is just the risk of the economy. And several years ago it was unheard of to -- for homes in backlog to cancel for someone being laid off. At least it was virtually unheard of. Today we're seeing -- we're starting to see some of that. We've been seeing that. And so the risk that we have in our backlog is really one that I think is largely economic. Change in circumstances that beset a buyer that, as a result, make it difficult or impossible for that buyer to close and, as a result, the buyer cancels.

[That decision], but based on 16%, I mean it seems like your can rate is still much better than it used to be.

It's come down.

Yes. Exactly.

And I mean historically most of those cancellations would occur within the first 30 to 45 days. We made the comment before relative to the economy, we don't think things are getting worse. And in that respect maybe they are getting a little bit better.

And on average sales price -- I'm not sure if this is the right way to look at it -- but just looking at the average sales price in backlog, the Midwest from Q1 to Q2 pretty flat and actually in the Mid-Atlantic it was actually up and Florida down. And I was wondering if anything to read is that do you feel like you're seeing some stability in the Midwest from an average sales price? And in Florida obviously it seems like it's still trying to find a bottom. And then in Mid-Atlantic probably, I imagine, more of a mix because you've got a lot of different cities in that Mid-Atlantic.

Lee, that's something we look at all the time as far as average sales price. Obviously as we sell more to first-time buyers, as we put our eco series and our Ssunrise series in more of our communities, that impacts it.

But like we said, it is up from March 31st from $230,000 to $235,000, but we're focused very, very much on trying to give consumers great values and a reason to buy. So we are spending a lot of time on product and price points, that's for sure.

All right. Thanks very much.

Thanks, Lee.

There are no further questions at this time.

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

This concludes today's conference call. You may now disconnect your line.