M/I Homes Inc (MHO) 2009 Q4 法說會逐字稿

Good afternoon. I will be your conference operator today. At this time, I would like to welcome everyone to the M/I Homes year-end 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 for joining us. Joining me on the call today is Bob Schottenstein, our CEO and President, Tom Mason, EVP and Corporate Counsel, Paul Rosen, Head of our Mortgage Company, Ann Marie Hocker, Corporate Controller, and Kevin Hake, VP of Finance.

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 non-public items with you directly, and as to forward-looking statements, I want 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 February 2011.

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

Thanks, Phil, and good afternoon, everyone. Thanks for joining us on the call today.

We're pleased with what we accomplished in 2009. In the face of uncertain and challenging market conditions, we made meaningful progress on many fronts. We materially reduced our operating loss in each quarter of 2009 and recorded pre-tax income from operations, net income, and positive EBITDA in the fourth quarter. This marks our first quarter of core operating income in nearly three years and our second consecutive quarter of positive EBITDA. Our gross margins improved throughout the year as well, going from 12.7% in the first quarter to 16.3% in the fourth quarter. Our expenses declined year-over-year in every quarter and were 20% below 2008 levels. Both our sales, or new orders, and our closings were very strong with new orders increasing 33% over 2008 despite a 20% decline in active communities and closings increasing 20% over 2008; and I'm also pleased to report that we're off to a good start. Our January sales were 21% ahead of last January and represent our best sales month since last July. Finally, we ended the year with our backlog value up over 25% from a year ago.

We also made considerable progress in the execution of a number of key and very important Company-wide operating initiatives. The development and rollout of our new Eco Series, which we believe are best-in-class energy efficient afford an homes in mid-2009 has been very well received by home buyers and we are now offering our Eco Series in most of our homebuilding markets. Our customer service scores for 2009 improved from 2008 in all relevant categories and we have improved our market share in every one of our nine homebuilding divisions.

During 2009, we strengthened our balance sheet and our financial position. We reduced our unsold owned lots from 8,800 to 7,200, generated cash flow of operations of $68 million, and in mid year completed a $53 million equity offering, all of which resulted in increasing our year-end cash balance to $132 million. We ended the year with no homebuilding bank borrowings and equity of $327 million, and improved our net debt-to-capital ratio to 18% from 36% a year ago.

Now to briefly review our regions. First, the Midwest Region. Healthy markets in the Midwest continue to be challenging; however, we continue to see some positive trends. In our Midwest operations, our new contracts were up approximately 40% during the fourth quarter when compared to the fourth quarter of 2008. We are gaining market share in all of our Midwest markets particularly Cincinnati. We're also very excited about the opening of a number of new communities in Chicago this year. At December 31, 2009, we owned approximately 4,300 lots in the Midwest, versus 5,200 lots a year ago. Our homes delivered for the quarter were up nearly 90% in the Midwest, when compared to this time last year.

Moving to Florida, general market conditions continue to be challenging for us in both Tampa and Orlando. Despite this, new contracts and homes delivered were both up approximately 5% for the quarter when compared to the same period of 2008. At December 31, we owned nearly 1,600 lots in Florida versus approximately 1,900 lots one year ago.

Finally, the Mid-Atlantic region. New contracts and homes delivered were both up approximately 35% for the quarter when compared to last year. At quarter's end we owned approximately 1,300 lots in the Mid-Atlantic region versus 1,700 lots a year ago. Our December 31, backlog in units increased nearly 45% from the prior year and our average sale price in backlog has increased approximately 25%. I should note that of the three Mid-Atlantic markets that we operate in, Raleigh, Charlotte, and DC, the DC market is by -- in our judgment, improving slightly and sales in 2009 were strong, our backlog is more than doubled since 2008's year-end.

In conclusion, as we begin 2010, we feel good about our position and we feel even better about our performance. While economic conditions remain difficult, marked by high unemployment, weak job growth, and poor consumer confidence, the general economy is by most measures more stable today than it was last year at this time, and frankly, there's more reason for optimism. Though no one knows when we will begin to see tangible signs of job growth and a stronger economy, we are confident that as conditions improve, we have the right strategy and the right people to return to profitability.

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

Thanks, Bob.

New contracts for the fourth quarter increased 32% to 448 with a net absorption rate of 1.5 sales per community per month for the quarter versus 0.9 a year ago. Our cancellation rate for the fourth quarter was 23%, down from 31% in the fourth quarter of '08. Our traffic for the quarter decreased 3%. Our sales were up 79% in October while traffic was down 21%. Sales were up 43% in November and traffic was up 11%, and our sales were down 6% in December, while traffic was up 9%, and as Bob commented our January sales were up 21% compared to a year ago.

Our active communities decreased 21% from 128 to101; the break down by region is 59 communities in the Midwest, 21 in Florida, and 21 in the Mid-Atlantic. During the quarter, we opened three new communities, while closing seven for a net decrease of four communities in the quarter. Our current plans are to open in excess of 20 new communities in the first half of 2010 and end the year with about 5% higher community count at 2010 year-end versus 2009.

Homes delivered in 2009's fourth quarter were 858 up 55% compared to last years 554. We delivered 81% of our backlog this quarter compared to 71% in '08. Our backlog of 650 homes is 15% higher than a year ago, plus our backlog average sales price of $272,000 is higher than 9-30's $248,000. We did not have any third party land sales in 09's fourth quarter in comparison to $3 million in 08's fourth quarter. Our fourth quarter results include cost of sales expense of $2.5 million related too imported drywall issues. We have recorded a total of $12.2 million in drywall related charges for homes that we delivered in our Florida operations.

Turning to impairments, in the fourth quarter, we recorded pre-tax charges of $23 million, primarily relating to $17 million related to land that we intend to build homes on and $6 million related to land that we intend to dispose of. These impairments represented approximately 850 lots in 19 communities, with about 36% of the impairments in the Midwest, 31% in Florida, and 33% in the Mid-Atlantic region; and for the 12 months ending 12-31-09, total charges were $57 million representing $55 million for impairments and $2 million for write-offs of deposits and pre-acquisition costs. We have impaired 66 or two-thirds of our current communities and in 2009 we opened 21 new communities. Approximately $23 million of previous impairment reversed into housing gross margins in the fourth quarter of '09.

Our gross margins exclusive of the impact of impairments and drywall charges were 16% for the quarter and 15% for the 12 months ending 12-31-09, compared to 9% and 12% in 2008 same period. G & A expenses for the quarter were $16 million decreasing 12% from last year. Selling expenses for the quarter increased $931,000, up 7% from a year ago, primarily a result of volume increases. SG&a totaled $30 million or 14.6% of revenue. This is down 22%, excuse me, down from 22% in last year's fourth quarter.

We currently employ about 535 people, which is down 6% from a year ago. Interest expense decreased $340,000 for the quarter and $2.7 million for the 12 months of '09 compared to last year; interest expense was 1% of revenue for the quarter. We had $3 million of income from operations for the quarter, compared to an $18 million loss during the fourth quarter of '08. We generated $8 million of positive EBITDA in this quarter, and this is our second consecutive quarter of positive EBITDA. We have $24 million in capitalized interest on our balance sheet at 12-31-09 compared to $26 million a year ago, which is about 4% of our FX.

We recorded a $30 million tax receivable during the fourth quarter primarily resulting from recently enacted tax legislation that allows losses to be carried back for up to five years. We expect to receive a $26 million cash refund in the first quarter of 2010 and the remaining $4 million by the end of the year. Our deferred tax assets and the associated valuation allowance declined by $19 million during the fourth quarter, largely due to the tax benefit from the NOL carry back. At 12-31-09 our gross deferred tax asset is $117 million which is fully reserved.

Now, Paul Rosen will address our mortgage company results.

Thank you, Phil.

Mortgage and title operations, pre-tax income increased from $587,000 in 2008's fourth quarter to $1.3 million in the same period of 2009. The increase was primarily the result of 53% increase in loans originated, from 455 in 2008 to 695 in 2009, along with favorable servicing release premiums. The loan to value on our first mortgages for the fourth quarter was 88% in 2009, the same as 2008. 62% of the loans closed with FHA-VA and 38% were conventional. This compares to 53% and 47%, respectively, for the 2008 same period. Over 80% of our communities are eligible for FHA financing.

Overall, our average total mortgage amount was $209,000 in 2009's fourth quarter, compared to $226,000 in 2008. The average borrower credit score on mortgages originated by MI Financial was 732 in fourth quarter 2009 compared to 729 in 2009's third quarter. These scores compared to 718 for both third and fourth quarter of 2008. Our mortgage operation captured approximately 85% of our business in the fourth quarter compared to 2008's 89%. At December 31, 2009, MI Financial had $24.1 million outstanding under the $30 million MIF credit agreement.

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

Thanks, Paul.

As far as the balance sheet, we continually focus on our capital structure, cash and liquidity. We ended the quarter with $132 million of cash, compared to 9-30's $103 million. Cash provided by operating activities for the three and 12 months ended 12-31-09 was $43 million and $68 million, respectively. Last owned and controlled as of 12-31-09 totaled 9,314 lots which includes our share of joint venture lots, 77% of which were owned and 23% under contract, and this reflects a reduction of owned lots of 18% from a year ago. The mix of lots owned and controlled are 58% in the Midwest, 19% in Florida, and 23% in the Mid-Atlantic.

With respect to our lots under contract, we had $2.6 million at risk in deposits, letters of credit, and pre acquisition cost at year-end. Total homebuilding inventory at 12-31-09 was $420 million, a decrease of $96 million or 19% below a year ago. Our unsold land investment at 12-31-09 is $234 million, which is 7,195 lots compared to $338 million which was 8,797 lots at 12-31-08; compared to a year ago, raw land and land under development decreased 13% and finished unsold lots decreased 44%. At 12-31-09, we had $129 million of raw land and land under development and $105 million of finished unsold lots. Our unsold lots totaled 2,410 lots and an average cost of $44,000 per lot, and this $44,000 average lot cost is 16% of our $272,000 backlog average sale price.

The market break down of our $234 million of unsold land is $118 million in the Midwest, $39 million in Florida, and $77 million in the Mid-Atlantic region. In the fourth quarter, we purchased $22 million of land and purchased $44 million of land for the year. As to land development expenditures, we spent $20 million in '09 for a total of land spend in '09 of $64 million. Our best guess today for 2010 land spend is $75 million in land purchases and $25 million in land development.

Premier community locations with desired financial returns continue to be hard to find. Our desired financial targets for new communities are 20% gross margins, sales pace of 2.5 per month, with an ROI target on a community basis of 20%. At 12-31-09 we had $10 million invested in joint ventures down from $13 million a year ago. These joint ventures are for land acquisition and development purposes only and are with homebuilding partners. We have one joint venture with third party financing and during the quarter, the JV made a principal reduction payment, which reduced the loan to $3 million. At the end of the quarter, we had $59 million invested in specs, 203 specs that were completed and 342 specs in various stages of construction. This translates into about five specs per community, and of the 545 total specs, 290 are in the Midwest, 138 are in Florida, and 117 are in the Mid-Atlantic, and at 12-31-08, we had 431 specs with an investment of $70 million and at 9-30-09 we had 388 specs with an investment of $42 million.

At 12-31-09, we had no borrowings under our $150 million credit facility. Our borrowing availability on December 31, '09 was $24 million. This is availability can increase if we secure additional assets or add value to assets that have already been secured, and the facility maturity date is October 2010.

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

(Operator Instructions). Your first question comes from the line of Joel Locher with FBN Securities.

How's it going? Nice quarter you got here. Just was wondering on the backlog conversion -- it was the highest that I've seen in probably ten years and just was wondering if you could sustain an elevated margin in the first and second quarter where there's one-time? The revenues were a lot higher than I expected -- most people.

Well, the conversion rate was a little higher due to our spec levels being a little higher; and we do have now about five per community in anticipation of the tax credit expiring in June, so the short answer is that we do hope that the conversion rate is a little bit higher. And it's really being driven a little more in the short-term just by trying to get the houses for the tax credit.

And the question on the gross margin, on the lots you purchased in '09 that you might deliver homes on, the differential in gross margin versus the legacy, what is it currently?

Well as we stated our desired returns for new communities are to have a 20% margin, that's what we're trying to get in 2.5 a month; and we did disclose that in '09 we opened 21 communities and we plan to open at least 20 in the first half of this year.

It's hard to get an exact margin on some of the older communities because a number of them have been impaired like we talked about. Of course, when you impair communities in general, you tend to generate margins in the 12%, 13%, 14% range, so that's not a difficult answer.

So you are achieving your 20% target of gross margin on a newer community?

That's something we watch and track very carefully and the majority of what we're purchasing the answer is so far, they are performing up to expectations.

Yes, the only thing I'd add to that, Joel, is -- it's Bob Schottenstein -- is that virtually all of our new communities are performing in I'd say the 18% to 24% range, and but the target minimum is 20%.

Got you. And just one question and I'll jump back into queue. Is your average selling price per closing going forward? Obviously, the backlog jumped sequentially, and the ESP might have jumped 24,000 or so. Do you expect for the closing to follow suit or will it be in the middle of the jump?

Yes, we're not providing any type of guidance when it comes to revenue and income in these type of difficult conditions. The backlog was a little higher than we thought it would be, but again when the backlog, if it's the 650 range versus during the year when it gets up over the 1,000 range, mix tends to impact it a little more. Bob talked about the Eco Series and the success we've had and also about 50% of our business continues to be first time buyers, so we were a little bit surprised that the average sale price was as high as it was at year-end.

Got you. Thanks a lot guys, I'll jump back in the queue.

Thank you.

Your next question comes from the line of Alan Ratner with Zelman & Associates.

Good afternoon, guys. Thanks a lot for all of the detail. I appreciate it.

Hi, Allen.

Nice quarter. Quick question though on the margin. There was a bit of a sequential drop off, if you strip out some of the capitalized interest in drywall expenses and that's obviously been a little bit different because it was trending higher throughout the first part of the year. Was there anything specific, maybe some more spec closing in the quarter that contributed to that slight drop off or are you just expecting a little bit of choppiness going forward?

Alan, we look at the margins, the margins are about 13% in the first quarter, 14% the second, 16.8% the third, and 16.3% the fourth, so not really. We are obviously trying to still generate cash, continuing to try to position the Company as best we can. The margins have improved 400 basis points from the start of the year.

If I could just add to that, for over two years now, our margins on "to be builts" have been greater than our margins on specs and while that differential has narrowed over the last 18 months, the fact is, in most of our markets, "to be builts" still come in at a higher gross margin, from the point-of-sale all the way through closing; and the fact that there was a number of spec closing probably a little bit more in Q4 than perhaps Q3, I'm sure that has something to do with that slight erosion.

Okay, so looking forward into the first half of this year when obviously you're building up the specs there might be some choppiness as well is what it sounds like given you'll have some spec product moving further?

Well the other side to what I said -- because it's really hard to answer -- but the other part of what I said, which I didn't say, was that at the same time that we saw that differential, we also saw each month gradual improvement in margins on specs, coupled with gradual improvements, some cases greater, margins on "to be built," so as a consequence, the average is from quarter to quarter increased and the mix could some time influence the extent of the increase and as we move through the year, our margins at sale both with respect to specs and "to be builts" was for the most part on the rise.

And we're also still working very hard on sticks and bricks cost reduction and we're making continued head way on that. Margins are very, very hard to predict as you know, Alan, but we were pretty pleased with the 400 basis point lift during '09.

Sure, absolutely. That's really helpful, and second, if I could sneak another one in, just on the FHA tightening and some of the rules that they set fourth a few weeks ago as far as closing cost limitations. Doesn't seem terribly onerous, but curious if you are seeing that to be a big deal. I would imagine, specifically in the Midwest markets where down payments might be a little bit lower than in the Mid-Atlantic.

I'm going to go out an limb and say it hasn't been much of an issue but now I'll be rescued and let Paul Rosen respond.

Part of the major change that FHA announced was increasing the down payment requirement on loans with credit scores below 580. For the last year or so it's been almost impossible to do any loan, including FHA loans, with credit scores below 620, so while the change looks like a conservative change, it really has had little to no effect on the business.

How about the closing cost contribution?

I was thinking more along the lines of the 3% limitation closing cost?

That will be such -- that and the increase in the premium. We've re-calculated, it had such a marginal effect that in effect we don't think it will have any effect on our ability to sell and close homes.

Okay, perfect and one quick one if I could, just the January strength, any particular markets where it was more pronounced than others?

Well, not really. We were really pleased with how all of ours did, particularly -- I don't know if you're in Cleveland, but you know what the weather has been like in the Midwest and at least one or two weekends were almost a white out, and there was very little shopping if any; and then of course this last weekend in Charlotte and Raleigh, the cities were under a snow emergency.

So, when you take into account that we had a few stumbling blocks thrown before us, we were very pleased to see a 21% jump in sales, and frankly pleased it was our best sales month since July of last year. It's given us reason to feel optimistic going into February. That's for sure.

Great. Let's hope it continues. Thanks a lot guys.

Your next question comes from the line of Josh Levin with Citi.

Hi guys good afternoon. How are you?

Good, Josh. How are you doing?

Okay. One of the first questions is the capital structure question. You have $130 million of cash and you get $30 million from the refund and that brings you to $160 but you do have a $200 maturity in 12. How do you think about doing that? Just take it out and refinance it in a debt market or is there a possibility you don't need more equity later on?

Josh, we're already thinking about that. We think we're in pretty good shape in the short-term from capital structure standpoint. We've not made any decisions yet, we're having our semiannual bank meeting in March. We're are becoming focused on, like you said, the $200 million of senior notes that are due in March of 12. We had not drawn under our bank lines for a number of quarters but they also mature the fourth quarter of this year.

The good news is there have been a number of debt equity transactions done so the markets do seem to be open. Right now, we are working hard not only on finalizing our 2010 budgets and getting up to a good start, but taking the best look we can at '11 and '12 to understand what we think our needs and desires are, but haven't made any decisions yet, but we're obviously starting to work on that and Kevin Hake coming on Board is going to help us a lot in that area.

And just a question on the community count. You said community count would be 5% higher year-over-year?

At the end of the year, Josh.

So that takes you 105 or 106 a year from now, but you said you'd increase it by 20 over the first half. Does community count spike up to 120 and come back down to 105 or those new communities are replacing old communities, so you'll be between 100 and 105 for the whole year?

Well you have to take into account not just openings, but ones that are closing, so we ended '09 with 101 and our thoughts are at the end of the year to be in that 105 range.

It's really hard when you start getting out to the second half of this year to predict what will be opening because some of that land being purchased and some of that activity is driven by how our sales are the first quarter or two, so we do feel pretty confident that we're going to open at least 20 new communities the first half, but there will be closings going on and again we feel like the end of the year we'll be in that 105 range.

And just one more question if I may? On the G&A side when you look at your total SG&A, should we think even if volumes pick up from here, is your dollar amount fixed right now? Do you have operating leverage for a while?

You know, Josh, we don't really give any projections on some of those things but as far as the way we see our business, we closed 2,400 homes in '09. It's our view that we could do 5% or 10% more business without a significant run up in those costs.

Okay, thank you very much.

Thanks, Josh.

Your next question comes from the line of Alex Barren with Housing Research Center.

Good afternoon guys. How are you?

Hi, Alex.

Just wondering if you could share your thoughts on the shadow inventory concerns, I guess some people have expressed.

Well, I just hope there isn't much of it. I mean, the fact that it's shadow, it's like -- there's certainly got to be some. The question is how much and what will the impact be. I do know that inventory levels have moderated and in some cases significantly in most of our nine markets. Right now as things stand, the ratio between new homes sales on the one hand and used home sales on the other is probably at an all-time high. I think it's over 10:1 on a national macro basis, and increasingly, it's very important for us to focus on the used home as one of our most significant competitors and to gather as much data and as much research about what people are buying approximate to our communities in terms of the used home alternative to make certain that we can compete against it. That's an issue that we have been all over and that we're focused on.

As far as how much contingent inventory there is out there, I do know this, that it's shadowed for a reason and that's probably because of the people that are sitting on it don't have confidence that now is a good time to sell and presumably when they start to put it on the market maybe that tells us that it's a good time to sell and if it is, that might mean that it's being offered in better times when it will be absorbable quicker. So without really giving you a specific answer because I don't know, I don't know that anymore than I know when job growth is going to come back, that would be our take.

Okay, but I mean, have you guys done any estimate as far as the communities that you're still building or nearby ones as far as what -- how many of those hopes are in default or in foreclosure that are competing against yours?

We absolutely look at that when we look at new communities and when we come to terms are strategies of our existing communities.

Okay.

Which is one of the reasons why I think our sales last year were so strong. I think we were proactive and I think our tactics -- your hindsight is always 20/20. In terms of our Marketing and selling strategy, you can't always say this but there's not a whole lot we would have done differently in 2009, because we felt very good about our comps.

Right, well certainly your sales seem to reflect your efforts have been worthwhile, so I guess I'm wondering, if you look going forward, are you guys more looking for land deals on finished lots like other builders are or are you thinking more that you'll just develop the land that you've got?

You know, I'll start there and you can maybe add-on, but what I'd say is our first, second, and third priority is to find premier locations that meet our minimum hurdles. If it were possible, we, like I suspect virtually every other home builder, want to buy finished lots on a just in time take down basis with a minimum option deposit. If it's possible to structure a deal that way and still get a premier location, we will, and by the way we've got a few of those that we have tied up within the last 12 months.

On the other hand if it requires a greater investment, it's just a question of a.) how good we think the location is and b.) does it meet our hurdle rates. Phil articulated the minimum hurdle rates in his comments. The fact is internally we've got two sets of hurdle rates, and we actually stress test at a greater level the both deals because there's more involved and there's more risk.

Okay, that's fair. Phil, I missed -- you gave really quick the number of the benefit from the previous impairments in the quarter?

Yes.

Was it 30 something?

And that number was approximately $23 million of previous impairment reversed into housing gross margins in the fourth quarter of '09, Alex.

Okay, appreciate it. Thanks. I'll get back in the queue.

Thanks a lot.

Thank you.

Your next question comes from the line of David Frank with Wagner Asset Management.

Hello this afternoon.

Hi, David.

I have two questions. First is on the -- what's happening with the preferred and the preferred holders. Have they joined the Board?

David, this is Tom Mason. We had our special election earlier in January and we did not have a quorum at that meeting so no, there were not two Directors elected.

What's the long term plan that you're talking about for the preferreds? Is there one?

Well, as far as the long term plan, we obviously have a fiduciary responsibility to our preferred stockholders. We have not paid dividends for six quarters. We have a restricted payments basket in our debt agreement, so we're focused every day on returning to profitability, as Bob talked about and continuing to make progress in our operations.

So your goal would be to reinstate the 9.75 dividend as soon as you can?

What we will do is we will focus on getting back to profitability, strengthening our balance sheet, we will look at dividends to preferred shareholders and common shareholders as we always would when it makes sense; and also as we talked previously with our bank line maturing in the fourth quarter, we're also going to be looking from a capital structure standpoint as far as what makes sense there, and then also we have the senior notes maturing in the first quarter of 2012, so we will be balancing off all those things based on how the Company is doing, etc.

Okay, my second question is on the impairments, quick calculation shows that over the last eight quarters you've been impairing about $25 million a quarter on average which is basically where you were in Q4 of '09. So they've stayed higher than I hoped. What's the prospects for impairments coming down this year?

Well when you look at the inventory at risk for impairments, obviously our inventory levels continue to come down with the biggest risk for impairment being the unsold land assets. Impairments are driven by our strategy, they're driven by market conditions, so we don't make any projections on those things, but we basically have not mothballed hardly any communities, we have continued to work through our investment, drive down our inventories, generate cash, so the inventory levels have come down, but again, it's hard to make any predictions as far as impairments.

I mean, do you think obviously the level of impairments is some indication to investors of what the economic conditions are out there, right? So it will be a good sign when they stop, I presume?

That's for sure. It will be a bad sign if they ever start up again.

Okay, thank you, gentlemen.

Okay, thanks, David.

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

Thanks, good afternoon guys.

Hi, Jim.

I guess the first question was wondering, you're obviously targeting a reasonably healthy number for additional land investments for '10. I know your hurdles but maybe could you color where if there's any characteristics to where you're able to find the deals you're looking for? Is it easier in your Midwest markets and maybe more competitive in DC, or could you give a little color on that front?

Jim, that's a really good question. When we look at our markets of course we look very closely at where we think there is the better demand of where we think the opportunities are for us. When we look at our land purchases today, our best guess for the year is the operations that we'll probably be buying the most land in is DC, Raleigh, Chicago, those three markets.

Exactly, just to amplify on that, DC, Chicago, and Raleigh collectively, Jim, will make up if everything pencils out and all the T's and I's get crossed and dotted, will make up over half the land purchases for the entire Company for the year.

Okay.

And frankly, there's two reasons for that. One, we're seeing deals that we believe make sense and two, those are markets that we have a much more aggressive growth track for the near term. Chicago's just really pretty much just finished its first full year and it's expected to do considerably more business in '10 and '11 and frankly, we're looking to grow meaningfully our DC operation as well, although it's market share today is probably the highest its ever been. It's not ideally where we would like it to be.

Okay, and then a two part question related to the impairments you took and which everyone else seems very prudent to do to the limits of your accountants will to use the tax benefit to push through as much of impairments as possible in '09. I know your target on incremental land, but any sense or color on that? All other things being equal that the impairments you're taking and now have taken in the last quarter or two might do to help the core margin level of plus16%?

Well, Jim again, we're trying to disclose as much as we can, that we did open 21 communities in '09 and then we anticipate opening an additional at least 20 communities the first half of this year. Our desired target margins on those are 20%. Communities that we've impaired, you know the way impairment rules work. They tend to generate margins in the 12%, 13% range and of course you'd have some others in the mid-teens range; so margins are something very difficult to predict.

We feel pretty good about our margins increasing 400 basis points during the year last year, but margin guidance and predictability is just very difficult.

Fair enough. And maybe I'll just try looking at it one other way and see what color you can give us, given where your assets and your asset tests stand now and the flexibility you had to be a little more aggressive on it given the tax benefit, do you feel like there's much left to impair or to be in the possible impairment bucket given where you stand today and if prices just stay flat?

Well, I'll come at that another way then. As I talked about in my remarks, our unsold land investment at 12-31-09 was $234 million, and our unsold land investment a year ago was $338 million, and when you break the $234 million down today, there's $129 million of raw land and land under development and $105 million of finished unsold lots, and the $105 million of finished unsold lots are an average of $44,000, so we feel pretty good about our finished unsold lots because that's only about 16% of our backlog average sale price, so when you ask me where the impairment risk is, it's in that $129 million of raw land and land under development, and that is a lot lower number than it was last year or the years before that, so maybe that's another way to give you some information.

Your outline is not going to go to zero, but you reduced it significantly.

Yes we have. We owned 7,200 lots today compared to almost 9,000 a year ago and as we said on a couple past calls, we're trying to get that owned land down to two maybe even less than a two year supply and we've made a lot of head way on that.

Okay, all right, great. Thanks.

Thank you, Jim.

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

Hi, Eric.

Hi. I've got a question about your preferreds. So once you get within compliance of the restricted payments basket, is the dividend mandatory or is that a Board decision, once you're in compliance?

The dividend is not cumulative, mandatory or anything like that, Eric.

Okay, on your G&A, you've got outstanding leverage this quarter and you're right close to where you were maybe back in "normal" times. Is it safe to say that the strategy now is not to shrink G & A any longer, it's now to try and find land with a gross margin that will cover that and then selling expenses appropriately?

That's a fair statement I think, Eric. We're still in somewhat of a defensive posture to be sure for all of the reasons that you'd expect. As we said in our remarks, while I think there's more reason for optimism today than there was a year ago, frankly, a year ago was a frightening time and there was no reason for optimism, so on the other hand, even though there's reason for optimism today, there's still a lot of potential headwinds and uncertainty and challenges and the economy on a relatively speaking and the prospects for new home sales, still in terms of historical levels is nowhere near where anyone would like it to be.

Having said all that we'll be a little less defensive and hopefully buy a little bit more land; look to grow selectively in those markets where we think we can get those margins; try to grow the top line; hopefully, get additional margin improvement through the initiatives that we first begin in earnest over a year ago with respect to reducing our brick and mortar; and reducing our cycle time and improving some of our internal efficiencies, which we think we've made, frankly, tremendous progress on. We think we've got very good sales strategies and sales staff and sales leaders and for the most part, we like our position, and we're ripe and ready to do more volume.

Without saying so you're at the end of that stage?

Well, I hope so. I mean, I'm not going to sit here and say that we don't have contingency plans. Frankly, we do, because no one really does know, and while what we believe, which probably doesn't mean anything because our opinion means no more than anyone else's, but we think that we're probably -- that things are not getting worse and we may see gradual improvement before the end of this year. Hopefully, we will. Every market is different as we all know and some, frankly already have begun to improve slightly. Clearly DC has.

How about Columbus? You mentioned Cincinnati, but you didn't say anything about Columbus? How is Columbus because I know that market went into its downturn a good two, two and a half years before everybody else?

So did Cincinnati. Cincinnati followed by about two weeks and Indianapolis was probably a month after that, and it all occurred, began to occur in the latter part of '04, frankly. Good news bad news is Columbus is the most head it in the State of Ohio but it's good negative job growth right now and unemployment that's too high; the macro market here is down 70% from where it once was.

On the other hand our market share is over 35%. The goodwill and market reputation we have is at an all-time high, and we are clearly outperforming. We own a little bit too much ground here, because of what we're ramped up to do before the fall, but we think Columbus is an excellent city for a lot of long term for a lot of the reasons that existed before 2005 in terms of State Capitol and large public university and fairly stable and diverse base of employment. I don't know if that answers anything, that's a pretty general Chamber of Commerce answer, but that's what I'd say.

Thanks for the color. Take care.

Thanks, Eric.

Your next question is from Joel Locher with FBN Securities.

On the senior debt, do you still have covenants where you can't buy it back in the open market?

Yes, we do.

Is there any chance those free up in the next quarter or two or what has to happen or is there just not going to happen?

No, that's not going to happen when we look at those covenants no.

Right, and just on your -- back on your G&A, just going forward, excluding any charges, including that, what would your run rate be per quarter say in the first, second, third quarter? Would it be $14 million?

You know what it was in '09, Joel?

Yes, I mean it ticked up a little bit. I'm just going forward and first quarter, second quarter, 2010, if you don't have--

I'm not going to make any predictions on that. When you look at our adjusted G&A, and I'll just use SG&A, you look at adjusted SG&A. We were 14.6% the fourth quarter; we were 17% the third. If you go back to the fourth quarter of '07, we were 13.2%, but again, as far as we think we can do a little more volume with our existing staff, but again, customer service, providing the quality product is very very important to us. We think we can get some leverage out of that and, as Bob said, we are focused on trying to increase our volume where it makes sense, but can't really give any projections on those type of things.

And the 16.3%, what expenses ran through or were there any one-time severance charges running through there this quarter?

The numbers I gave you as far as the adjusted SG&A --

So it's 14.7% is that what you said?

The adjusted SG&A for the quarter, which would have severance and those type things out of there, the adjusted SG&A was 13.8%.

13.8%. Got you. All right, and that's it. Thanks a lot guys.

Thanks, Joel.

Thanks.

Your next question comes from the line of Alex Barren with Housing Research Center.

Thanks, I had a follow-up here. So as I'm thinking about how you guys are planning to increase your profitability in 2010, I'm just looking or trying to figure out what levers will be the ones that will be seen here. Is it more margin expansion because of the newer deals and cost cutting? Or do you still think you have some room for SG&A lowering tha?t Or is it just more sales? Where do you guys see --

The answer, Alex, is all of those things in that as Bob talked about, as far as certain markets, as far as DC, Raleigh, Chicago, we think there is a short-term and long term opportunity for more volume. We do hope to still improve our margins. We're focused very hard on not just stick and brick reduction, but having better house plan, better options, better pricing, and in certain communities, we are seeing a little better pricing power so we're hoping to drive margins up. We're also hoping to get some SG&A leverage there, so the short answer is all of those things.

Okay.

Although just to be clear, there's probably not much to be gained from absolute dollar for dollar reduction in SG&A. The SG&A improvement will come more from leverage of increased volume than through dollar for dollar reduction, whereas a year and a half ago, we were radically cutting dollar for dollar.

So I guess at this point you feel like you've got the appropriate staff and you've made all of the cuts you need so that going forward it's just a matter of getting the volume?

And depending on the volume, you may end up adding certain construction people or certain salespeople, depending on the volume, but the short answer to your question, Alex, is yes.

Okay. That's fair, thank you.

Thanks.

There are no further questions at this time.

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

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